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Uplisting Beats IPO Game

A safer strategy than playing IPOs is to seek underfollowed names with signs of a looming uplisting.

By Rick Pearson November 06, 2009

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Although Hyatt Hotels (H) traded up by over 10% following its IPO, Dole Foods (DOLE), Rail America (RA) and Shanda Games (GAME) are all recent IPOs that are trading well below their IPO prices.

By contrast, recently uplisted stocks such as Puda Coal (PUDA), China Agritech (CAGC) and Rino International (RINO) are still holding onto double-digit gains following their first-day listing pop. One stock that is providing all of the positive clues of an impending uplisting is Orient Paper (ORPN).

Based on its current attractive valuations and uplist potential, ORPN could provide an IPO-like pop, with even more upside remaining for long-term holders. With a single-digit P/E ratio and plenty of cash, ORPN offers a lot of upside potential with minimal downside risk. (Note that due to its recent reverse split, many financial data sources will have an incorrect share count and thus an incorrect P/E ratio for ORPN. The current P/E is approximately seven).

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A recent article on Bloomberg titled "IPOs Unravel as Aviv Shelves Share Sale Amid Record Low Returns" noted that:

"The U.S. company IPOs in the past two months have beaten the benchmark index for American equities by 0.5 percentage points in their first month of trading, the worst performance in Bloomberg data going back to 1995. Thirteen of 18 companies are trading below their initial sale price, Bloomberg data show."

Some IPO highlights are as follows:

Dole Foods (DOLE) recently raised $446 million in its IPO and fell nearly 2% on its first day of trading. It is now trading at $11.63 vs. its IPO price of $12.50.

Shanda Games raised over $1 billion from its ADR IPO and is now down 15% from the offer price. Likewise, RailAmerica (RA) is down by 20%. A summary of recent IPO underperformers is as follows:

Company (Symbol)	Offer Date	Offer Price	Recent Close	% Gain/
Omeros Corp (OMER)	10/7/09	$10.00	$6.51	-34.9
Cumberland Pharmaceuticals Inc (CPIX)	8/10/09	$17.00	$12.48	-26.59
ZST Digital Networks Inc (ZSTN)	10/20/09	$8.00	$5.97	-25.38
RailAmerica Inc (RA)	10/12/09	$15.00	$12.02	-19.87
Addus Homecare Corp (ADUS)	10/27/09	$10.00	$8.47	-15.3
Shanda Games Ltd (GAME)	9/24/09	$12.50	$10.69	-14.48
Vitacost.com Inc (VITC)	9/23/09	$12.00	$10.56	-12
Apollo Coml RE Fin Inc (ARI)	9/23/09	$20.00	$18.05	-9.75
Banco Santander Brasil (SABSBR)	10/6/09	$13.40	$12.24	-8.68
Artio Global Investors Inc (ART)	9/23/09	$26.00	$23.80	-8.46
AGA Medical Holdings Inc (AGAM)	10/20/09	$14.50	$13.35	-7.93

For smaller investors, getting allocated shares in an IPO comes with a well known contradiction -- the winner's curse. If the IPO is a hot one, and likely to perform well in the aftermarket, it is almost impossible to get an allocation of shares.

If the IPO is a dud, and likely to underperform in the aftermarket, it is much more likely that retail investors will get their orders filled. I feel that a much safer strategy is to look for underfollowed companies that show all the signs of an imminent uplisting.

An "uplisting" is where an OTC traded stock takes steps to formally list on a major exchange, typically the Nasdaq or Amex, occasionally the NYSE.

Prior to uplisting, companies will typically take some very recognizable steps to meet the exchange criteria, including 1) restructuring their board of directors such that a majority of directors are independent 2) creating the required board committees (audit, compensation and nominations committees) and 3) undergoing a reverse split to meet the minimum share price criteria of the exchanges ($3 minimum for Amex, $5 minimum for Nasdaq).

One great example is Orient Paper. The company is in the business of producing various paper products, including corrugated and photo quality paper. The company trades on a single digit P/E despite very strong revenue growth and huge gross margins. The company recently raised $5 million from institutional investors (including China America and Renaissance Capital) to expand into the photo quality paper business in China -- a business that has 60% gross margins and high barriers to entry (such as government approvals and environmental requirements).

I like the deal because it has a well defined and profitable use of proceeds and included no warrants or convertibles to complicate the capital structure. ORPN shows all the signs of an imminent uplisting including restructuring its board to meet Nasdaq/Amex corporate governance requirements and a just-announced reverse split to meet the senior exchange share-price requirements.

From its Oct. 9 press release regarding board member changes: "Following these changes, Orient Paper's board of directors is now comprised of five directors, three of whom are independent. The Company also established Audit, Nominating, and Compensation Committees."

Having these committees and a majority of independent directors are explicit requirements of both the Nasdaq and the Amex, and the company's choice of wording in the press release reflects these requirements almost verbatim. As a result, the press release seems to be telegraphing this clear objective.

Yesterday, the company effected a 1:4 reverse split, putting the share price well above the required threshold for a Nasdaq or Amex listing, and as a result, the only remaining step is to be approved for listing.

Other things I like are that ORPN has recently ramped up its efforts to attract institutional investors, including attendance at institutional investor conferences (Roth, Rodman&Renshaw, Brean Murray) and appointing CCG as its investor relations agent.

I recently had dinner with Chairman Zhenyong Liu and I have spoken with CFO Winston Yen by phone, and I like what they have to say; it is clear that they have a "big cap mentality." The company is committed to growing the business in a profitable way and committed to expanding its institutional investor base.

I currently own shares of ORPN and my hopes are for an eventual double or triple once it trades on the Nasdaq or Amex. The company has offered to let me tour its facilities, and once I do so, I plan to post a follow-up article here including photos of the facilities and a management interview.

The reason I like to pursue the uplist strategy is that it is achievable and profitable. Unlike trying to claw one's way into an IPO allocation, shares of ORPN can be purchased in the open market today.

Unlike an IPO issuance, there is no phenomenon of insiders and VCs trying to time a hot market to unload shares at an inflated price. Instead, the uplisting represents the beginning of the institutions just getting into a newly available stock.

I currently track a number of potential uplist candidates, but ORPN is what appears to be the most likely and most imminent. Once the uplist occurs, it is typically too late to get the pre-list valuations.

Looking back to September, China Agritech rose nearly 12% on the day of its uplisting and currently trades at a level 20% above that. Puda Coal rose by over 20% on the day of its uplisting and still trades at a substantial premium. While the timing and execution for an uplisting by ORPN is not certain, I think it offers enough downside protection that the smart move is to get in sooner rather than later.

At the time of publication, Pearson was long ORPN.