The Coming IPO All-Star List

For seven years I ran a hedge fund that traded IPOs. And for most of those seven years I had a stomping good time. So you can imagine how hard it is for me to watch from the sidelines.

That's why, now that I'm no longer trading, I find it almost too painful to listen when my friends mention the huge allocations they are getting on the latest fireball issues. Almost daily some wiseacre calls to rattle off his successful trades, and even as I congratulate him I can feel my head start to pound. I feel like a pro athlete who's benched during an important game.

I sometimes combat these feelings with fantasy. It is not uncommon for me to make up a short buy list of deals I would buy were I still in the game.

Anyway, I ran through my database this morning and came up with a few deals that I like. The idea was to skim the cream and compile a list of the three most-promising IPOs on the calendar. So, without further ado, here they are:

Red Hat (RHAT:Nasdaq), a leading developer of open-source software including Red Hat Linux, will sell 6 million shares, set to come to market between $10 and $12.

According to numbers in the filing, Red Hat is growing like a weed. Revenue has risen around 120% annually since fiscal 1995, to $10.8 million for the year ended Feb. 28.

While the company posted a $91,000 loss for fiscal 1999, the bottom line over the last few years has hovered around break-even, occasionally creeping into the black side of the ledger. Margins of this sort in a fast-growing start-up signal both steady fiscal control and an intelligent use of capital. In an age in which strong revenue growth is often accompanied by mounting losses, this says a lot to me.

Red Hat has also amassed an impressive list of investors and strategic partners. Consider the weight of an investment by Benchmark Capital Partners, which owns a full 9.7% of the preoffering shares, and Intel (INTC), which ponied up for a neat 5% stake.

Add to the mix an alignment with a number of the big boxmakers, namely Compaq (CPQ), Dell (DELL) and IBM (IBM) and the software giants Netscape, Novell (NOVL), Oracle (ORCL) and SAP (SAP) and you get what appears to be an incredible amount of support from some of the biggest players in the technology community. The offering is scheduled for the week of Aug. 8. Quite simply, I expect this to be the most exciting IPO of 1999.

drugstore.com (DSCM:Nasdaq) will issue 5 million shares at between $9 and $11. The company combines a retail drug, health and beauty store with an online health information source. The concept is great and the execution is exceptional, as you can see from the Web site, www.drugstore.com.

The company has a very limited operating history but has managed to post some pretty impressive sales growth. Sales for the six months ended July 4 were $4.2 million, though losses in that period amounted to a staggering $30.4 million. I've learned to ignore dirt on a balance sheet so long as the business model makes sense and the company is getting traction in its chosen space. drugstore.com is doing just that.

What really makes me stand up and take notice of this deal is the list of smart-money investors that have early-round positions in the company. Amazon.com (AMZN) will hold better than 27% of the stock after the offering, Rite Aid (RAD) will own more than 21% and the good people at Kleiner Perkins Caufield & Byers ponied up for just over 16%. I'm a big believer in the value of strong partners. Needless to say, I like this deal.

Foundry Networks (FDRY:Nasdaq) is a fairly new addition to the calendar, filed on July 9. The deal doesn't have terms as of this writing, but the quality of this IPO was obvious to me right away. Foundry produces networking and switching products for companies and Internet service providers. Lately the market has gone absolutely gaga over these Internet backbone/infrastructure plays. Think Juniper Networks (JNPR) and Gadzoox (ZOOX). This one is just as sturdy.

For the six months ended June 30, Foundry posted revenue of $39.5 million, resulting in (hold onto your hats) a profit of $2.9 million. In this environment nothing speaks louder than black ink. My feeling is that this little enterprise is well-run and destined for greatness.

That's it for my list; I've spilled my guts. Will I be right? Will these be the big winners for this summer? Only time will tell. One thing is for sure: People will be talking about these three for some time.

Oh, one more thing: If you get involved and make a bundle, do not call me up -- it's just too painful for me.

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