The Next Big Thing Column (Originally published on June 06, 2012)

At the moment, the IPO market is facing stiff headwinds, causing the flow of new deals to dry up. In fact, there were no new IPOs for a month following Facebook's (FB) massively disappointing IPO on May 18, with just a few deals pricing in the past week. Instead of opening the door for more IPOs -- which many had expected would be the case -- Facebook's IPO has had the opposite effect, damaging investors' confidence levels. This, combined with the steady headline risk flowing out of Europe, and rising macroeconomic concerns, has created a tumultuous environment for IPOs.

However, our IPO expert analyst, Dennis Hobein says, "there is a silver lining to this."

The weak environment that now faces the IPO market has the potential to create some intriguing opportunities for investors down the road. As the IPO market begins to warm up following a prolonged down period, the initial deals to come through the pipeline are typically priced quite conservatively. Investors are understandably hesitant to jump back into riskier assets such as IPOs, so investment bankers are more motivated to price these deals attractively.

The goal going forward is to identify upcoming IPOs that look to be priced attractively -- particularly those that have identifiable growth catalysts ahead. Today, the IPO calendar is still light on upcoming deals, with the few confirmed deals being lower in quality. The road ahead may still be rocky for IPOs given the uncertainties facing the broader markets, but eventually, companies will need to turn back to the capital markets. "Patience will need to continue to be exercised, but, once deals begin to trickle out, there will be opportunities for those willing to take on some risk when others are not," Dennis says.

One prominent example that comes to mind is Broadsoft (BSFT), which went public back in June of 2010. As many will recall, back in May of that year, the European sovereign debt crisis first began to rear its head as video of riots in Greece came streaming across the TV and as the acronym "PIIGS" became familiar to all. The so-called "Flash Crash" also struck on May 6, in which the Dow lost nearly 1,000 points in a matter of minutes. Volatility was very high at that time, creating a poor environment for the IPO market. Just like today, demand dried up, causing some companies to shelve their IPOs, while others priced very weakly.

BSFT, which is a provider of software to the telecommunications industry, basically stumbled out of the gate, pricing at the low end of expectations and then opening 8% below its IPO price. This wasn't too surprising given that investors were still cool on the IPO market. But, its poor pricing allowed for a reasonable valuation with a trailing P/S of 3.2x, which is quite low for an IPO from the technology sector. The gains didn't come right away, but, this low valuation created a potent catalyst for the stock once BSFT appeared on investors' radars. This occurred when it reported its 3Q results in November of 2010. Its upside report was the spark that lit a fire under this IPO, setting the stage for an eventual 489% surge versus its IPO price by March of 2011.

Highlighting Some Recent IPOs With High Dividend Yields (UAN, RNDY, MTGE, HLSS, AMTG)

While the stock market is enjoying a solid move higher today, in front of Ben Bernanke's testimony to Congress tomorrow, investors and traders still have a sense of caution and skittishness. The recent pull-back in the stock market, the ongoing headline risks out of Europe, and the global macroeconomic uncertainties have had investors looking for safe-haven, income-producing investments. More specifically, stocks that are currently offering high-yields, and also are trading at reasonable valuation levels, have been especially in high demand. With this in mind, we wanted to scan for recent IPOs that are looking particularly attractive on a dividend yield basis.

CVR Partners (UAN) -- IPO Date: April 8, 2011; Priced at $16 vs. $12.00-$14 expected price range; Up 29% vs. IPO price

UAN is an IPO that quietly became one of the top-performing IPOs from 2011. At its pinnacle, in early February this year, shares of UAN were trading 94% above its IPO price. The strong performance of its IPO was mainly a function of a favorable environment for ammonia and ammonium nitrate prices due to rising agriculture commodity prices -- especially corn -- which led to solid financial results for the company. Additionally, at the time that UAN was preparing to go public, the company was just exiting a difficult period in which its operations were substantially hampered by the outage of a urea ammonium nitrate vessel that curtailed its production. That issue was resolved shortly after it went public, allowing its production of ammonia UAN to increase sharply. For its fourth quarter, the company produced 100,800 tons of ammonia and 178,300 tons of UAN, compared to 69,900 tons of ammonia in 4Q10 and 77,800 tons of UAN.

After its strong run, shares of UAN tanked, plummeting by about 30% since the beginning of May. The trouble started when it reported its Q1 results, missing on both the top and bottom lines. EPS came in at $0.41, missing the expectations by $0.04, and revenue was $78.3 million, short of the $85.4 million consensus. A primary culprit for the miss was unscheduled down time for plant maintenance in March, lowering its expected production. On a growth basis, though, the results were still solid. Net income was up 81% from a year ago, and revenue jumped by 36%.

After its disappointing results, the stock also came under pressure due to the May USDA WASDE report, which was bearish for corn prices, and thus, bearish for fertilizer prices going forward. Generally speaking, the report showed that corn inventories were higher than expected, suggesting that farmers will not need to plant as much corn, and therefore, will not need to purchase as much fertilizer.

From a broad basis, though, UAN is well-positioned to benefit form increased bio-fuel usage, the continuing trend in emerging markets to more protein-rich diets, as well as continued population growth. Additionally, the company is nearing the end of a two-year plant expansion process that it expects will increase UAN production capacity by 400,000 tons.

Business Description

CVR Partners is a limited partnership formed by CVR Energy (CVI) to own, operate, and grow its fertilizer business. The company derives substantially all of its revenue from the production and sale of nitrogen fertilizers, primarily in the agriculture market. Its facility includes a 1,225 ton/day ammonia unit, an 2,025 ton/day urea ammonium nitrate (UAN) unit, and a gasifier complex.

One of the distinguishing characteristics about CVR is that its nitrogen fertilizer manufacturing plant is the only operation in North America that utilizes petroleum coke, or "pet coke", in the gasification process to produce fertilizer. Pet coke, which is produced during crude refining, is the primary ingredient in its nitrogen fertilizer production process. Most of CVR's competitors use natural gas as their main raw material, which the company says is more expensive, and also typically has more volatile prices than pet coke.

Another notable difference between UAN and its competitors -- which include Agrium (AGU), Potash (POT), & CF Industries (CF) -- is that the company focuses almost completely on sales of nitrogen fertilizers, while its peers diversify into other crop nutrients like phosphate and potassium, and generate sales in the lower-margin industrial market. Furthermore, UAN upgrades a large portion of the ammonia it produces into higher margin UAN fertilizer -- an aqueous solution of urea and ammonium nitrate which has historically commanded a premium price over ammonia.

Current Dividend Yield:UAN currently has a dividend yield of 10.4%. Furthermore, its valuation looks pretty reasonable, with shares trading with a 1-year forward P/E of 13x and a trailing P/S of 4.5x.

Roundy's (RNDY) -- IPO Date: February 8, 2012; Priced at $8.50 vs. $10-$12 expected price range; Up 104% vs. IPO price

Roundy's is another IPO that we liked when we published our initial preview for it -- primarily due to its very high dividend yield. Its not a stock that is going to "wow" investors with its growth rates, or growth potential, but its cash flow generation and dividend give it a couple attractive attributes.

Looking back, RNDY's IPO did not price well at all, coming in well below expectations ($8.50 vs. $10-$12), but it quickly found upward momentum when it opened for trading as value/yield investors stepped into the stock. After opening at $8.40, RNDY charged higher nearly unabated over the next few months, trading at a high of $12.50 on May 8. During this time, RNDY reported its first quarterly report as a public company on March 1, but there weren't any estimates at this time. The company's EPS and revenue grew a scant 7% and 2.2%, year/year, but again, RNDY's isn't viewed at as a high-growth name. The stock was little changed the day after its report, but its upward trend resumed thereafter until it reported its next quarterly report in mid-May.

On May 10, the company reported a Q1 EPS beat of three cents, reporting EPS of $0.28, but revenue was only inline with estimates at $938 million, and its guidance was fairly weak. Specifically, it guided for FY12 EPS of $1.30-$1.42 compared to the $1.42 consensus with revenue growing by a modest 2.5-3.5% year/year to $3.9-$4.0 billion versus the $3.96 billion consensus. Following a sharp run-up in the stock, this unimpressive guidance was enough to cause traders and investors to dump the stock and lock in profits. The stock fell by roughly 17% the following day. Since then, though, shares have been slowing churning higher and have been displaying some notable relative strength over the past month.

Background

Roundy's is a Midwest supermarket chain with leading market positions in its core markets. In fact, it's the largest grocery chain in Wisconsin. It currently operates 158 grocery stores in Wisconsin (122 stores), Minnesota (32) and Illinois (4) primarily under the Pick 'n Save (Wisconsin), Rainbow (Minneapolis), Copps (Madison, WI) and Mariano's Fresh Market (Chicago) retail banners. Roundy's has made it a focus to be a major player in each of its markets. In fact, the majority of its sales is in markets where it holds the number one market share position.

Rather than quickly expanding into new geographic areas, Roundy's has done well by blanketing an entire market achieving scale through its large, concentrated store network. Roundy's weighted average market share of 44% across its Wisconsin markets is among the highest regional penetration rates of any US grocer. Roundy's already is the dominant grocery chain in southern Wisconsin (Milwaukee/Racine) with 66 Pick 'n Save stores so it makes sense that a key part of RNDY's expansion plan is to expand into Chicago with its Mariano's Fresh Market franchise

Current Dividend Yield & Pay-out Ratio: RNDY's current dividend yield stands at about 8.6%, which is quite robust. We would point out, though, that RNDY's carries a significant amount of long-term debt ($702 million) and some wonder if it would make more sense to lower its dividend a bit and use those savings to pay-off its debt. Its payout ratio, which calculates the percentage of earnings paid to shareholders in dividends, is also high. For the first quarter, its payout ratio stood at about 82%.

A Few Mortgage REITS to Consider

Mortgage REITS, while not "sexy" by any means, have been in favor lately due to their high yields. A number of sell-side analysts have also been out with bullish notes on the group recently as well. For example, Barclays says its outlook suggests agency REITs -- REITs that hold mortgage backed securities that are insured by the Federal government -- will be outperformers. The firm says that the recent flight to quality has caused a rally in the rates and mortgage markets, which has led to stronger book value performance for REITs that predominantly have higher agency exposure.

Given that we typically focus on high-growth names for "The Next Big Thing", we don't typically focus on the mortgage REIT space. But, we wanted to put a few recent mortgage REIT IPOs on your radar, as they can be solid income-generating investments. Here are a few to consider:

• Apollo Residential Mortgage (AMTG): IPO Date: July 22, 2011; Priced at $20 vs. $20 expected price range -- The company, which is externally managed by ARM Manager, seeks to construct a portfolio of assets that consist primarily of agency mortgage backed securities, but over time, AMTG may look to diversify into a broader range of other residential mortgage assets. These may include non-agency MBS and residential mortgage loans... Current Dividend Yield: The stock has a yield of 16.3%.



• Home Loan Servicing Solutions (HLSS): IPO Date: February 29, 2012; Priced at $14 vs. $14-$16 expected price range -- HLSS is a newly-formed company created to acquire mortgage servicing assets consisting of mortgage servicing rights, rights to fees and other income from servicing mortgage loans, and associated servicing advances. The company does not originate or purchase mortgages, so it is not subject to the risk of loss on mortgages. Also, HLSS plans to engage one or more residential mortgage loan servicers to service the mortgage loans, and therefore, it does not expect to develop its own mortgage servicing platform... Current Dividend Yield: The stock has a yield of 9.10%.



• American Capital Mortgage Investment (MTGE): IPO Date: August 4, 2011; Priced at $20 vs. $20 expectation -- MTGE is a newly-organized REIT organized to invest in and manage a leveraged portfolio of agency mortgage investments, non-agency mortgage investments, and other mortgage related assets. The company believes that the residential mortgage market will undergo dramatic changes in the coming years as the role of GSEs -- such as Fannie Mae and Freddie Mac -- are diminished, which should create attractive investment opportunities for MTGE ... Current Dividend Yield: The stock has a yield of 15.3%.

--Dennis Hobein, Equity Analyst