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

An Exclusive Update on the IPO Market was originally featured in the Penny Sleuth.

Earlier this week, battery maker A123 Systems (NASDAQ: AONE) commenced public trading of its shares, raising more than $340 million in the largest IPO of 2009. Those who got into the stock early have been rewarded handsomely – shares are up nearly 70% right now. But AONE is only the latest in a string of initial public offerings that capped off the biggest week in IPOs since 2007.

To be fair, that hasn’t been a difficult benchmark to beat. Since the fallout from the credit crunch began, the IPO market has deteriorated to the point where only a single U.S. company went public in both the last quarter of 2008 and the first quarter of 2009. Things heated up again last quarter with 13 public offerings, but those numbers still paled in comparison to the 95 stocks that traded for the first time in the last quarter of 2007. Now, with murmurings of the recession’s end upon us, the bullish signals from an IPO resurgence shouldn’t be ignored.

Not everyone agrees with that prognosis…

“The fact that the many in the media are classifying three IPOs as a resurgence is evidence of how low our expectations have become,” National Venture Capital Association President Mark Heesen said in a statement picked up by Reuters.

“[This] not the direction we hoped to see. While the psychology of the market is trending positive, our original forecast of a true recovery not beginning until 2010 still unfortunately holds true,” he continued.

And while Heesen’s concerns about the IPO market’s recovery have been echoed throughout Wall Street this week, it’s inaccurate to say that a recovery in public offerings isn’t happening right before us. At the start of this week there had been 11 new public offerings in the third quarter of 2009. That’s a huge departure from the nearly post-mortem IPO market that we were in the midst of six months ago.

IPO bears lost more credibility on Wednesday when Talecris Biotherapeutics (NASDAQ: TLCR) went public, breaking the year’s domestic IPO record for the second time this week. The biopharma stock raised $950 million in its offering, the biggest IPO for the sector since 2006. The Talecris offering comes after China State Construction Engineering Corp’s record-breaking $7.34 billion IPO on the Shanghai Stock Exchange, and a week ahead of Banco Santander’s public offering next week, which at $7.25 billion will once again bust the year’s record for the biggest American-traded IPO.

What were the “experts” saying about a dead IPO market until 2010?

And with some exciting companies filing to go public in the coming months – including NewEgg.com and Dollar General – things aren’t slowing down yet. To be clear, a strong IPO market doesn’t necessarily say much about stocks in general. The S&P 500 has already slumped 2% this week despite all of the offering activity that’s happening before us. It does bode well for small-cap stocks, however…

There’s a big argument going on right now among the vast majority of investors: some are claiming that the market is perfectly primed for a 10 year bull rally, while others are bracing for the next market correction. But in the small-cap world, things move very differently. Every single U.S. IPO this year has been a small-cap stock, which tells me that the investment banking syndicates – which have some of the most advanced market data available – are bullish on small-caps.

Why does IPO activity suggest where the big investment banks are putting their money? Studies by Nobel Prize winning economists Franco Modigliani and Merton Miller showed that, historically, investment banking syndicates and venture capital firms will not push companies to go public in a down market. That phenomenon actually makes a lot of sense, because in a bear market, investors are willing to contribute far less money to a stock’s underwriting premium – the “commission” that an investment bank gets by selling an IPO’s shares for more than they paid.

By unleashing primarily small-cap IPOs so far this year, evidence points to growth opportunities in the small-cap space.

So, how do you make a play off the potential of penny stocks? Look for small-cap plays that remain deeply undervalued to capitalize on the buying that’s going on right now. That’s a more difficult prescription than it was six months ago before the market rally, but ignored penny stocks still remain one of the last vestiges of value right now.

It’s also important to keep in mind that sentiment is prone to change. While small-caps might be a favored market space right now, a huge drop in the rest of the market will undoubtedly take penny stocks with it. We’ll continue to watch broad moves with our Small-Cap Recovery Index for that very reason.

There’s little question that IPOs are having a fantastic quarter, one that will break records for the year once all of the numbers are crunched. And as long as the industry’s experts continue to be disappointed in the wake of unrealistic expectations, most investors will miss the growth sentiment in small-caps. That makes right now a perfect time to position your portfolio.

Cheers,
Jonas Elmerraji

October 2, 2009

Why the Latest Trend in IPOs Is Great for Penny Stock Investors was originally featured in the Penny Sleuth.