Investors are always on the hunt for the next undiscovered stock.  What better place to look than the IPO market?  Here is the land of newborns, baby stocks newly christened into the world of capitalism and ready to burst with potential growth.

We thought the same, but after analyzing the performance of 2014’s best performing IPOs, we think not. We warn investors that toddler tantrums, schoolyard scuffles and adolescent rebellion often precede the calm and predictable nature of a mature stock.

The top ten performing IPOs of 2014 gained an average of 223% from their IPO price until year end. Every single one of them at least doubled with the top gainer, Radius Healthcare (Nasdaq: RDUS), skyrocketing an astounding 387%.  One would imagine these companies’ business models and prospects were well vetted by investors.

Yet in 2015, these ten stocks have returned an average loss of 14%.  When digging further into the numbers the carnage is ugly.  Of the 2014 top ten IPOs, only four are up in 2015.  Of the six decliners, their average loss was 56%!

It can be tempting to jump on board Global Blood Therapeutics (Nasdaq: GBT), the best performing IPO of 2015.  The company, whose novel manner intent on discovering therapies for blood disorders, certainly sounds exciting.

But are you smart enough to tell the difference between a Global Blood Therapeutics and Avalanche Biotechnologies (Nasdaq: AAVL) whose stock gained 218% in 2014 only to see it crater 84% this year due to an abandoned clinical trial?  

We recognize that biotech investing introduces a whole new level of risk but gut wrenching drops have not been reserved solely for biotechs. Truecar Inc. (Nasdaq:TRUE), who sells sales leads to auto dealerships, has collapsed 74% this year after losing its biggest contract with AutoNation (NYSE: AN). GoPro (Nasdaq: GPRO), the infamous purveyor of thrill-capturing cameras, has dropped 52%.

It’s not that we don’t like IPOs.  Depending on the market’s fancy, IPOs can provide solid prospects to investors.  Unfortunately, the last two years’ best-loved new issues have been focused on biotech or fast growing companies with little profits.  It’s always wise to keep your eyes open for new names but the warning of “past performance is no indication of future profits” is more relevant than ever.

Around the Roadrunner Portfolios

Taro Pharmaceutical Industries (NYSE: TARO) continues to tread water so far in 2015, but the stock is up 10% since our December 2014 inclusion in the Roadrunner Momentum Portfolio.

The company reported impressive revenue growth of 40% for the June quarter.  However, growth adjusted for a charge against revenue last year reveals revenue growth of 10%, a more likely marker for future growth.  Net income more than doubled to $2.42 per share.

The maelstrom surrounding Turing Pharmaceuticals, the company Hillary Clinton blasted for “price gouging” due to its abrupt price increase from $13.50 to $750 per pill, may also be hanging over Taro’s shares.  Although Taro’s price increases are not nearly as large as Turing’s, the company notes that sales volume declined 10% in the quarter with the improvement in revenue coming from price increases.  

Management does not conduct conference calls or offer any earnings’ guidance to investors, but in its press release CEO Kal Sundaram sounded cautious about pricing pressure in generics:

As we have stated in the past, we remain cautious of the ever-increasing pressure on our business from strong competition and the continuing industry and customer consolidations. We continue our commitment to building a strong, quality pipeline of products through our investment in our R&D efforts which, along with our business development efforts, will help to fuel our medium and long-term growth.

Analysts estimate Taro will earn $13.73 for the year ending March 2017 up 15% from March 2016. With a PE of 11 and earnings’ growth of 15% it certainly looks like the current stock price reflects the political risks of the industry.

Taro has consistently generated positive cash flow and currently holds $23 of cash per share. The recent news that the company won FDA approval for proprietary drug Keveyis should alleviate some investor concern over the generic pricing pressure that CEO Sundaram describes above.

Paycom Software (NYSE: PAYC) seems to have the winning formula for a rising stock price- beat estimates, rinse and repeat.  For the second quarter, reported on 08/04/15, Paycom did what it had done the previous 2 quarters, beat earnings’ estimates by roughly 60% and beat revenue estimates by roughly 10%.  

Revenue of $49 million was up 47% and earnings per share of $0.10 were up from a loss of $0.01 last year.  The company sells human resource software on a subscription basis to employers.  Its software suite helps companies manage their employees’ full life cycle from recruitment to retirement.  It’s five modules, Talent Acquisition, Time and Labor Management, Payroll, Talent Management and HR Management are seamlessly tied together.  The company’s unique single database solution allows companies to pick and choose which functions to subscribe to and allows all of them to share the same data.  No longer does the Human Resource department have to manually enter hours or rates that the Payroll Department has already downloaded.

The beauty of Paycom’s business model is that its customers are sticky.  Once an employer has signed on for one service, it is a monumental and risky task to switch over to a different supplier. Paycom’s team is constantly adding new functionality, like Paycom Learning, which automates employee training and onboarding.  Its internal salesforce can quickly reach out to captive customers and entice them with new offerings.

Paycom’s stock is expensive on a pure PE basis but when compared to a basket of other Software as a Service (SaaS) companies, trades at the lower end of the valuation range. Continually complicated regulations on healthcare and wages should keep Paycom’s customers coming in the door.

Paycom is up 18% since being added to the Roadrunner Momentum Portfolio in April 2015.

A temporary lull in earnings’ growth due to currency fluctuations has put the brakes on Gentherm (Nasdaq:THRM) but higher growth is right around the corner. After several quarters of beating estimates, investors found Gentherm’s second-quarter results disappointing. Revenue of $213 million slightly missed estimates of $222 million and earnings per share were $.03 shy of $.56 estimates.

Gentherm, who primarily manufactures cooled and heated seats for autos, saw its foreign sales hit by the strength of the U.S. dollar.  Adjusting for the currency impact, revenue would have been $227 million, handily beating estimates.

The most exciting news, however, was that the company was recently awarded an initial contract for its revolutionary thermal management systems in a car’s motor.  This product helps to reduce the heat emitted from a car’s battery.  Excessive heat erodes the life of a battery and creates a problem for car manufacturers.  As Daniel R. Coker, Chief Executive Officer, noted on the company’s conference call, this contract puts Gentherm in the forefront of innovation with this new technology:

Our knowledge of thermoelectrics and how to package them, manage them and manufacture our devices with them was our strength, and that allowed us to win a very sophisticated customers concept competition. And then we were able to beat out all comers once the concept had been determined to be a thermoelectric device. We were the guy who won the contract based upon our strengths.

These strengths are not only the technological know-how but years of experience negotiating contracts and supplying reliable, proven products to automotive manufacturers.  Gentherm’s thermal management system will help improve the reliability of new electric cars and lower the cost of battery warranty protection.

Unlike heated or cooled seats, this new feature is built into a car’s drive train so demand is not predicated on consumer preference but from the manufacturer’s desire to improve functionality and lower costs.

This new contract will start to add to revenue later this year and should continue to boost profits for many years if Gentherm wins more awards, a likely scenario based on its success rolling out other products to multiple manufacturers.

Gentherm trades at a PE of 18 on 2016 estimates, reflecting the expected 18% growth for 2016. However we think this new contract boosts growth and the stock should move higher as the new contracts begin to flow through earnings.