3 'Fallen Angel' IPOs That Could Post Giant Rallies

Amid a soaring U.S. stock market, several high-profile new issues have been big losers. However, bargain hunters are scooping up "fallen angel" IPOs in hopes of big rebounds.

"We just don't see a lot of downside where these stocks are trading at now, and we have an opportunity to make 50% to 200% on our capital that we're putting to work today if we take a multiyear time horizon," Aram Green, who manages the ClearBridge Select Fund (LCLAX), and co-manages several other ClearBridge funds, told Business Insider. His top picks are ride-hailing company Lyft Inc. (LYFT), business software firm Dynatrace Inc. (DT), and direct-to-consumer seller of teeth straightening devices SmileDirectClub Inc. (SDC).

Significance For Investors

Through the close on Dec. 10, Lyft is down by 37.1% from its offering price, and SmileDirectClub by 65.4%, while Dynatrace is up by 52.2%. Ride-hailing service Uber Technologies Inc. (UBER) is down by 38.0% and collaborative software company Slack Technologies Inc. (WORK) by 14.4%. Workspace sharing company WeWork put its IPO on indefinite hold after its private market valuation plunged by $40 billion.

Legg Mason owns ClearBridge. Kiplinger's rates ClearBridge Select the best mid-cap fund over the past three years, and the third-best over the past five years, per BI. It is rated five-stars by Morningstar, outperforming 97% of its peers over five years and 99% over three years, as well as the Russell 2000 Mid Cap Growth Total Return Index.

Green calls online used-car retailer Carvana Co. (CVNA) a recent success. From an initial offering price of $15 in April 2017, it soon fell under $9, but now is over $89. "There was a lot of skepticism over the model being profitable, whether it could actually be a sustainable business," he said. Green kept buying despite disappointing quarterly results, and reports a gain of about 750%.

Lyft, Green acknowledges, is burning a lot of cash. However, ride hailing in the U.S. is growing and "becoming less competitive with the market being solidified with two players that are both public." He also believes that Lyft, smaller than rival Uber, may be acquired by a company focused on autonomous-driving technology.

Lyft's Q3 2019 earnings beat the estimates, with revenues up by 63% year-over-year. While the net loss was up by 86%, it was down by 50% after adjusting for one-time items. Lyft has upgraded its guidance for 2019, anticipating faster revenue growth and a smaller loss.

Dynatrace, Green says, is "a company that is very profitable." He adds, "It has very high cash-flow margins in the business and a lot of ample runway, particularly in the upper end of the enterprise market."

SmileDirectClub has these positives, per Green: "It's a very simple, consumer-friendly, and economic offering for people to fix their teeth. We see a serial entrepreneur [CEO], they don't need access to more capital, a massive, massive market opportunity." The negatives include cash burn and regulatory problems. The dental lobby secured restrictive legislation in California that requires reviews of x-rays by orthodontists, Barron's reports.

Looking Ahead

Vincent Deluard, the director of global macro strategy at INTL FCStone, is among the skeptics. He sees trouble in the IPO market, including tech stock valuations that are "at the beginning of a massive unraveling."