11/4/2013 10:15 PM ET|
Investors rush to join IPO frenzy
The Container Store offering capped a busy month in October, and Twitter's debut is imminent. All signs say investors are hungry for more.
Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.
October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. This week is slated to bring a dozen more initial offerings, including Thursday's expected $1.6 billion stock sale by Twitter, the biggest Internet IPO since Facebook (FB).
Container Store Group (TCS) rose 101% on its first day of trading Friday, making it the sixth company this year to double in its first day of U.S. trading. There were eight such doubles in the previous 12 years, according to data tracker Dealogic.
The rush to buy shares of newly public companies is the latest sign of investors' thirst for assets with potential upside, at a time when relatively safe investments are generating scant income due to tepid economic growth and Federal Reserve policies that have kept a lid on U.S. interest rates.
Many of these companies aren't profitable. But investors increasingly are willing to roll the dice, particularly on technology firms that they say have the potential to "disrupt" the industry.
"After all these years of the market going up, investors are getting reacquainted with equities," said Alan Gayle, senior investment strategist at RidgeWorth Investments, which manages $49 billion in Atlanta. "In a slower-growth environment, the newer names are much more likely to be disruptive. Disruptive companies are more likely to grow their top line at a fast pace."
Healthy rebound or a risk?
To some, the hunger for shares of newly public companies is a sign that the IPO market has begun to find its footing after five years in the doldrums, and could return to being a driver of growth for companies looking for capital to expand and hire.
To others, however, the demand is an indication that a rally fueled primarily by abundant liquidity from the Fed, and not by earnings growth and economic expansion, is entering dangerous territory.
"When I hear intelligent investors asking me not which companies are good to invest in, but which IPOs can I get into, it scares the heck of me," said Mark Lamkin, a wealth-management adviser based in Louisville, Ky.
So far this year, 61% of companies selling U.S.-listed IPOs have lost money in the 12 months preceding their debuts, according to Jay Ritter, professor of finance at the University of Florida. That is the highest percentage since 2000, the year the Nasdaq Composite Index roared to its all-time high.
Investors this year are putting a higher value on debut companies' revenue than at any time since the crisis. The median IPO this year has been priced at five times the past 12 months' sales, according to Ritter. That is the highest mark since 2007, when the median ratio was more than six times.
Companies holding their IPOs in the U.S. this year have posted an average 30% gain in share price, according to Dealogic. That compares with a 23.5% advance in the S&P 500 index.
Many IPOs this year have raised funds to pay back debt to private-equity owners rather than to invest in corporate expansion, a use of funds that many observers say is more likely to lead to stronger performance. So far this year, 41% of U.S.-listed IPOs have been of private equity-backed firms, according to Dealogic.
Container Store, for example, said the proceeds of its IPO mostly would fund a payout to its backer, Leonard Green & Partners LP, and to 130 former and current employees.
Lamkin says he has fielded an upswing in calls from clients about IPOs such as Twitter, but so far he hasn't recommended any. "I've looked at two or three IPOs recently, but I haven't been excited about their earnings or barriers to entry," said Lamkin, referring to technology-industry jargon that deems a company a better investment if it bears advantages that rivals would be hard-pressed to match. "They aren't what I would consider good investments on their own."
To be sure, this year's boom is just a fraction of the size of the 1999 frenzy, and companies emerging from this year's IPO boom are typically more robust than in that period.
In 1999 and 2000, the median IPO company was valued at more than 25 times past-year sales, according to Ritter. Many had revenue of less than $50 million. This year, fewer than 40% of IPOs fall into that category.
And so far this year, 3% of the 190 U.S.-listed IPOs have doubled in their first trading day. That compares with 22% of the 536 U.S. debuts in 1999.
"These are good companies," said John Bichelmeyer, co-manager of the $450 million Buffalo Emerging Opportunities Fund, the top small-cap growth mutual fund by three-year performance, according to Morningstar. "It's just, you're pricing in all the growth on day one."
In addition to Container Store, which ran 62 stores as of Oct. 1 and believes it can increase that number to 300, investors last week also gobbled up two Chinese Internet companies, Qunar Cayman Islands (QUNR), an online travel-bookings service, and 58.com (WUBA), a web marketplace. None of the companies made money in their latest fiscal years, but all advanced at least 58% in their debuts.
Ven Katari, a retired physician who lives in the Westchester County suburbs of New York, says he has put in a request for Twitter stock with his brokerage, after doing so with Facebook's IPO last year. He says he looks at many IPOs, avoiding those he can't buy directly from underwriters before they begin trading.
"If I can get in, I think there is a lot of upside," he said.
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