Year-Old IPOs That Deserve a Second Look

Regular readers know that we like to find stocks of good companies at reasonable prices. Investors may associate initial public offerings (IPOs) with sky-high valuations, particularly among high-profile debuts in their first weeks of trading. We thought we'd check in on some IPO companies after the initial buzz subsided to see if we could find any attractive stocks.

During 2004, the IPO market came back to life with just over 200 new offerings after three tough years with less than 100 new offerings per year (200 per year is considered "average"). Of course, IPO issuance reached a fever pitch during the late 1990s and 2000, with almost 500 new offerings in 1999 alone. So far, 2005 is coming in a bit below normal, but it is still respectable, with roughly 130 companies going public so far.

Searching among the companies that became public during 2004 to find companies in our wheelhouse--moaty businesses trading at favorable valuations--we found several narrow-moat businesses and a lot of no-moaters, but, alas, no wide-moat firms. There are no 5-star opportunities on the list, either, but there are several 4-star stocks worthy of mention.

The narrow-moat companies that look good to us as of Sept. 29:

Archipelago 
Risk rating: Above average
Recent price % above/below our fair value estimate: -31%
From the  Analyst Report: "Markets have long been good businesses. Since at least medieval times, for-profit marketplaces have offered safety to merchants and buyers, providing theft protection and a court to resolve disputes. The merger of electronic stock exchange Archipelago and the 213-year-old nonprofit New York Stock Exchange will create NYSE Group, a modern for-profit market with a narrow moat."

Assured Guaranty (AGO)
Risk rating: Above average
Recent price % above/below our fair value estimate: -21%
From the  Analyst Report: "Assured Guaranty earns a nice living insuring the repayment of debt issued by governments and selected asset-backed securities issued in the capital markets. The firm benefits from slowly compounding entry barriers that yield a narrow economic moat, a business model that will benefit from continuing credit growth, and a dominant position offering relatively scarce AAA rated financial guaranty reinsurance."

Kinetic Concepts 
Risk rating: Average
Recent price % above/below our fair value estimate: -19%
From the  Analyst Report: "We see KCI's VAC patents, which do not start expiring until 2013, as the foundation of the firm's moat. Barring any legal rulings against KCI, we expect the firm to dominate with VAC for the foreseeable future. KCI also continues to innovate by adding features and devices, such as VAC Instill, to automatically deliver topical solutions without disturbing the dressing. These new features and devices add layers of strength to KCI's patent portfolio and competitive position."

Blue Nile 
Risk rating: Average
Recent price % above/below our fair value estimate: -18%
From the  Analyst Report: "Blue Nile provides quality-seeking, value-conscious consumers with an option to purchase fine jewelry online. This purveyor of gems, known for its customized engagement rings, is shaking up the diamond industry with its exclusive agreements to sell select diamond manufacturers' stones online. While the online diamond jewelry market is nascent, we think Blue Nile has developed an extremely solid position and will continue to expand its share."

Educate 
Risk rating: Average
Recent price % above/below our fair value estimate: -17%
From the  Analyst Report: "We like Educate's prospects over the next five years. There are still more than 700 franchised territories that the company could eventually acquire--it owned just 144 as of June--and Educate thinks there is a possibility for 1,000 more territories in North America. Monetizing the well-known but still small Hooked on Phonics brand could provide another lucrative income stream in the coming years."

Good Firms at High Prices
Another interesting subset of 2004 IPOs is made up of companies with narrow moats that trade at rich valuations. We also like the following companies, but they're priced too high to buy right now:

Greenhill & Company 
Risk rating: Above average
Recent price % above/below our fair value estimate: 69%
From the  Analyst Report: "Greenhill & Co. is a boutique investment bank founded less than a decade ago by legendary investment banker Robert F. Greenhill. In this reputation-driven business, the former president of  Morgan Stanley  and former chairman and CEO of Smith Barney (C) has himself been the source of a narrow moat, drawing both clients and well-respected senior bankers (managing directors) to the firm. However, the cyclicality of investment banking and the importance of a few key employees create an above-average-risk business."

Navteq 
Risk rating: Average
Recent price % above/below our fair value estimate: 57%
From the  Analyst Report: "When someone uses navigation equipment in a car, on a personal navigation device, or on the Internet, chances are that NAVTEQ is providing the map data. We like this narrow-moat company and believe it will be a clear winner as the navigational market continues its rapid growth."

Google (GOOG)
Risk rating: Average
Recent price % above/below our fair value estimate: 43%
From the  Analyst Report: "People now say that they 'google' instead of search for information. Google has managed this success despite spending less than 8% of its 2004 revenue on sales and marketing, building the brand almost solely by word of mouth. The use of search engines is free and, we believe, habit-forming. We think users are unlikely to switch without some substantial functional improvement."