IPO market is off to a good start

May 27, 2011
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So far this year, the U.S. market for Initial Public Offerings is ahead of last year on a year-to-date basis. As of the middle of May, pricings were up and volume had risen substantially from the same period a year ago. Returns, however, were down from 2010.

According to Renaissance Capital, pricings were up by 26.5 percent while volume was up by a staggering 189.5 percent from a year ago. Filings also were up, but only slightly.

Jeff Lambert, president and managing partner of Lambert, Edwards & Associates, pointed out that the pricing gains of the IPO market were in sync with gains the Dow Jones and NASDAQ recorded.

“I think what you have is a macro-economic market that is driving the IPO markets. You have more optimism — whether it’s the Consumer Price Index or the actual market itself — so you’re seeing more IPOs go into that kind of market because you want to price an IPO when the market is stronger and has a higher price to raise more capital,” said Lambert, whose firm provides investor-relations services along with its public communications and public relations business.

“If you put this in the context of year-to-date, or over the last year, the Dow Jones Industrial Average from this point last year is up 25 percent. NASDAQ is up 28 percent. So, the overall market has grown and that really conditions the financial market for IPOs. And there should be a correlation there.”

Lambert said an IPO pretty much prices a company’s future performance, and because companies have grown their earnings for much of the past year, investor optimism has risen. He also said history shows that growth stocks receive more attention from investors and, in turn, receive higher premiums than value stocks and commodities. “So growth seems to be driving the overall market, including IPOs.”

To make his point, Lambert cited the recent IPO held by LinkedIn. Its final pricing of $94.25 a share was up by 109 percent from its opening price of $45 a share. Investors stuffed $8.9 billion into LinkedIn’s till in one day. LinkedIn turned out to be the biggest Internet IPO since Google went public in 2004, and it may set the stage for two more virtual IPOs expected to come from Facebook and Groupon. Analysts consider LinkedIn’s stock a growth stock, the type Lambert said is driving today’s IPO market.

“What happens in a market when that occurs is it reinforces that the IPO market is strong. Brokers, traders and money managers read the papers, too, and follow the markets. So (LinkedIn) can be a leading indicator of overall activity. So I think it’s only going to get stronger, as evidenced by the success of that IPO,” said Lambert.

But IPO total returns were 9.9 percent this year, as of May 17. A year ago, that figure was 25 percent. That comparison, though, may not paint a completely accurate portrait of the market at this point in time. “But then you have recent successes, so you’d almost want to separate 2010 from 2011. It’s stronger in the first part of 2011 than it was in the third and fourth quarter of the prior year and year-to-year,” said Lambert.

So far this year, technology firms recorded 21 of the 62 IPOs that had taken place by mid-May and captured $2.8 billion from investors. But health care and energy companies netted the most proceeds through the period. Ten health care IPOs drew $4.4 billion, while eight energy firms did a bit better at $4.5 billion.

“I think based on the upward momentum, the second half is going to be stronger than the first half. I think you’re going to see more activity in strong sectors like health care, but also in the consumer sector. I think that’s going to be a change. There is going to be a shift more toward consumer as, again, the economy improves and those private-equity-owned companies decide now is the time to go out,” said Lambert.

“And then also, an increase in the international (market) — in particular, China. Some Chinese companies have been maligned, but there still is a very strong core of China-based companies that I would expect to continue to be a decent portion of the IPO market for the foreseeable future.”

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