Research Approach
Renaissance Capital’s research process addresses the unique aspects of the IPO market, a segment in which the existing body of knowledge about each company is limited, historical trading charts are incomplete, financial information is not easily accessible, industries are new and variable, and research coverage ebbs and flows with IPO issuance. Because IPOs are different than seasoned equities, the Firm’s research analysts assess each newly public company not only on the merits of its fundamentals and governance, but also within the context of its likely valuation and technical peer groupings.
Research Rating System
Renaissance Capital evaluates each IPO by applying a five-part rating scale ranging from “very weak” to “very strong” to the following four categories:
- Company Fundamentals – For this category, the Firm’s analysts evaluate the strength of the company’s financial track record, its competitive position in its industry, its business model and earnings power.
- Corporate Governance – For this category, the Firm’s analysts focus on how closely the interests of the company’s management and the board of directors are aligned with the interests of new public shareholders. Areas examined include stock holdings of insiders, conflicts of interests, and number of independent directors.
- Relative Valuation – For this category, the Firm’s analysts use a wide variety of financial metrics including Price-to-Sales, Price-to-Earnings, Enterprise Value-to-Cash Flow and P/E-to-Earnings Growth, to compare the newly public company with its most comparable publicly-traded peers.
- Relative Strength – For this category, the Firm’s analysts study the trading performance relative to the market of the stocks in the new company’s peer group as a proxy for the expected trading of the new company’s stock.
Based upon the total ratings for these four categories, each stock is then assigned one of three overall investment ratings:
- Underperform – Stock is expected to perform below the relevant broad market over the next three months.
- Marketperform – Stock is expected to perform in-line with the relevant broad market over the next three months.
- Outperform – Stock is expected to perform better than the relevant broad market over the next three months.