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Buy These Stocks While They're New

The IPO market in 2006 wasn't hot, which we think created good buying opportunities.

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During 2006, investor demand for initial public offerings (IPOs) was again fairly tepid: By our tally, about 200 companies went public--roughly the same number as the previous two years--but well below the overheated figures seen during the heady times at the end of the 1990s. Morningstar has been tracking the ranks of newly public companies for years, looking for businesses (and stocks) worthy of attention. But more recently, we've increased the amount of attention paid to the IPO market, and our analysts have taken a hard look at many of the firms that went public last year.

We bring the same research process to a firm regardless of its tenure as a public company, looking for firms with strong competitive positions and stocks trading well below our assessment of fair value. Because we have a broad array of industry expertise, we're able to put a new offering in proper industry context (though there are times when we have the opportunity to learn about new businesses--see  Grupo Aeroportuario del Pacifico (PAC)). Since firms tend to go public when valuations favor the seller (a disadvantage to investors), we spend time thinking about why a company is going public and looking at demand for the shares shortly after the offering.  MasterCard (MA) is a great example of a situation in which insiders were selling stock for reasons other than maximizing their returns. The banks that owned MasterCard were looking to raise funds to cushion against and separate themselves from potential legal liabilities.

Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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