An Exclusive Update on the IPO Market

There are few investment transactions that draw as much excitement from Wall Street as the initial public offering… better known as an IPO. IPOs bring private companies public, giving retail investors the opportunity to put their money into a stock once reserved for venture capital firms and entrepreneurs. But with the economic turmoil we’ve seen in the market in the last couple of years, IPOs have been few and far between – until now. Here’s an exclusive update on what’s to come for the IPO market in 2010.

Like I mentioned on Monday, Agora Financial’s small-cap team was at the New York Stock Exchange on Friday, attending an IPO conference to hear the latest updates on what’s going on in the new issue market right now. And given Tesla Motors’ (NASDAQ: TSLA) high profile IPO earlier this week, I thought now would be a particularly timely opportunity to talk about this niche of the market…

For small-cap investors, IPOs hold a special role; after all, with more than 82% of IPOs valued at $300 million or less – 80% percent of which sit right between $50 and $150 million – most stocks that go public are still small enough to offer exciting growth potential.

The past couple of years have been anything but auspicious for the IPO market. According to Renaissance Capital, 2008 saw only 43 public offerings, a far cry from the 273 back in 2007 before the market tumbled. 2009 wasn’t much better with 63 IPOs, but the tides are beginning to change…

We’re only halfway through the year, and already 64 companies have gone public and another 130 have filed with the SEC to go public. That suggests more than 100% growth in the IPO market over what we’ve become accustomed to – a definitively strong sign for investors.

That’s because the IPO market is largely indicative of the broad market. When times are good, investors usually get excited about the growth prospects of IPOs, bidding up their prices in the process.

But when the market is bearish, IPOs historically generate smaller returns for the companies, investment banks, and private equity owners involved – that means that the only companies who go public in bear markets are the ones that are either impressive enough to get investors’ attention regardless – think Visa’s (NYSE:V) IPO back in 2008 – or the ones that are really hurting for cash.

As a result, stronger investor sentiment generally means that higher-quality IPOs are headed your way.

Stronger investor sentiment is exactly what we’re seeing right now. Despite the increased market volatility of the past few months, the Consensus Index is reporting that bullish sentiment has risen from 39% to 49% bullish in the past three weeks. Likewise, since IPO activity usually trails market activity, and because 2009 was such a banner year for stocks, we’re seeing many of last year’s IPO filing start to hit the market now.

Ultimately, that means we’re feeling pretty bullish about IPOs right now. There are some truly exciting new companies going public in 2010 – and you’re going to be among the first to learn about them. This summer, we’ll be publishing recurring IPO watch issues of the Penny Sleuth with all the details you want to know about the hottest small-cap IPOs to hit Wall Street. Stay tuned…

Sincerely,
Jonas Elmerraji
Managing Editor, Penny Sleuth

July 1, 2010

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