The IPO market finally appears to be heating up

The initial public offering market, which has already produced some high-quality returns from a short list of companies this year, could represent a real investment opportunity over the next few months as more companies line up to take advantage of the stock market’s momentum.

Although there might be a tendency to discount the IPO market based on the fact that there are no companies scheduled to go public, it is important to consider the context of this market and to recognize the general trend that appears to be unfolding.

Assuming the five new IPO filings so far this month constituted a typical Wall Street August slowdown, July represented a relative burst of activity with 12 companies filing to go public. To put that number into perspective, compare it with the 15 filings made during the previous six months.

To be sure, the number of filings in July is way off from monthly filings in extreme bull market cycles.

Consider, for example, August 2007, when 49 companies filed plans to go public, or April 2004, when 48 companies took the plunge.

But we are now in the midst of what the economists like to call a new paradigm — so 12 filings in a month isn’t anything to scoff at.

The reality is, the IPO market has been so quiet since the credit markets froze up and the stock market took a nosedive last fall that you would have to go back to August 2008, when 14 companies filed plans to go public, to find a more active month.

Even with just 21 IPOs so far this year, there is reason to believe that the activity following Labor Day will help 2009 finish ahead of the 43 IPOs in 2008.

“The IPO market looks dead, but it’s really not,” said Kathy Smith, a principal at Renaissance Capital LLC, a Greenwich, Conn., research and investment management services firm.

“By and large, the deals that have been done are working, and when the IPO market sees returns, the investors come back,” she said. “We think there’s a good chance of the number of deals this year beating last year’s total.”

Such an outlook is supported by a robust pipeline of companies waiting to kick off IPO marketing campaigns, as well as some impressive IPO performance figures.

Through Thursday, the average gain of the 21 companies that went public this year was 30%.

The FTSE Renaissance IPO Composite Index, a market-cap-weighted index of all IPOs during the past 24 months, gained 34% this year through Thursday, compared with a 12% gain by the Standard & Poor’s 500 stock index.

The hottest IPO of the year so far has been Beijing-based online video game developer Changyou.com Ltd. (CYOU), which has seen its stock rise more than 148% since it went public in April.

Of the top five IPOs this year, none has gained less than 56%.

Ms. Smith thinks that the strong performance of recent IPOs will entice companies to announce specific dates for going public after Labor Day.

Part of the argument can be supported by pure pent-up demand, fueled by an IPO window that was essentially closed from September through March. In that period, just two companies went public.

And that pent-up demand, combined with the higher standards that come with a tighter credit market and a more cautious investor base, has managed to produce enough examples of rock-solid IPOs to encourage additional activity.

“In the past, we’ve seen the IPO market defy the summer doldrums, so in more normal times, we might see companies right now saying they will be pricing in September,” Ms. Smith said. “But we do expect to see companies teeing it up to start marketing their deals after Labor Day.”

Some of the IPOs that are likely to get under way in early September are potentially marquee-type deals.

JBS USA Holdings, a Greeley, Colo.-based meat processing company, filed July 22 to offer $2 billion worth of stock.

Hyatt Hotels in Chicago filed Aug. 5 to issue $1.1 billion worth of stock.

In addition, three companies that filed in the last two days of July are each hoping to issue between $300 million and $500 million in stock.

On a total-dollar-volume basis, there are no expectations to surpass the $28 billion raised through IPOs last year. But as Ms. Smith pointed out, the 2008 figures were skewed by the March IPO of San Francisco-based Visa Inc. (V), which at $17 billion ranks as the largest IPO in U.S. history.

A new Investment Insights column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at [email protected].

Related Topics: Initial Public Offerings (IPO)