The past few years have been tough for the IPO market. With credit scarce and few investors willing to part with capital in 2008 and 2009, investors looking for access to new businesses have found limited options. But that’s about to change. The IPO market is heating up in 2010, and small-cap investors could end up being the biggest beneficiaries. Here’s why you should be watching the small-cap IPO market this year…

For the uninitiated, an IPO – or initial public offering – is the most well known method of taking a company public. Because IPOs give investors their first taste of companies that are new to hit the stock market, they’ve long been touted as one of the most exciting investments available; after all, it’s not uncommon to see IPOs rocket in price in the months following their first trading days.

And because most IPOs are firms that are still relatively nascent, these stocks are of particular interest to small-cap investors like us.

In the tech boom of the late 1990s, IPOs entered the mainstream as a slew of tiny technology firms went public to capitalize on the bubble. And though the subsequent burst and recession of the early 2000s slowed the pace of initial public offerings, they continued to get priced at breakneck pace until 2008’s market malaise came to bear on stocks. 

Why Did IPOs Slow Down in 2008?

When a private company decides to go public, it’s no small decision, and the company’s owners (typically a combination of venture capitalists, private equity firms, angel investors, and company founders) are strongly incentivized to get the biggest returns possible.

For professional investors – like VCs and other private equity firms – going public is one of two main ways to exit an investment (the other being third-party acquisitions). So they’ve paid a great deal of attention to how to get the most bang for their IPO dollar. One way they do that is by staying away from the stock market when times are tough…

Studies have shown that IPOs dry up when stocks are under fire. That’s little surprise for most people – when equities are in a bull market, owners can get higher valuations for their IPOs and investment banks can get higher underwriting spreads. In a bear market, however, more cost-conscious investors are less likely to overpay for growth potential, and companies that can afford to stay private opt to more often than not.

That’s not to say that there’s absolutely no IPO activity in bad markets, but barring a good timely reason to go public, there’s a bad stigma attached to stocks that need the capital bad enough to IPO among the bears. That’s about to change.

IPOs Are Back on in 2010

While the increased market volatility investors have seen since May has impacted sentiment toward stocks right now, it hasn’t halted the increased interest in IPOs that’s currently taking place…

So far this year, IPOs have raised $75.9 billion internationally – a 1,586% increase over last year’s paltry proceeds. That’s a pretty staggering improvement in a market that’s largely thought of as a bellwether for the overall economy.

And there’s plenty more growth available to today’s small-cap investors. Of the 113 IPOs that were filed for 2010, only 52 have been priced (i.e. launched) already. That leaves plenty of upcoming initial public offerings for the rest of the year.

Even though foreign stocks have taken some hits in recent months, overseas companies continue to lead the IPO pack. That’s especially true in Asia, a region that’s contributed 64.4% of the world’s IPOs in 2010. Of the region, the biggest country for new stock offerings was not surprisingly China.

We’ve long been fans of investing overseas for the business and currency diversification it can provide – and some of Agora Financial’s best minds have been spending some serious time in China to that end. (We will fill you in on this latest trip soon.)

Hopefully you understand the potential of this exciting market a bit better now. There’s plenty of activity going on in the IPO market at present, and we want to make sure that you’re part of it – keep a look out for the Penny Sleuth’s recurring IPO watch later this month…

Sincerely,
Jonas Elmerraji
Managing Editor, Penny Sleuth

June 9, 2010

Jonas Elmerraji

A big-four public accounting alum, Jonas Elmerraji brings his readers extensive expertise in small-cap stocks and broad market moves. Elmerraji’s interest in the market started with an investing course in elementary school – today he holds a degree in financial economics from UMBC and specializes in blending fundamental and technical analysis. Elmerraji has contributed to Forbes, TheStreet.com, and Investors Business Daily among others. He is managing editor of the Penny Momentum Trader, and a co-editor of Penny Stock Fortunes.

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