- The impact of IPOs is an important dynamic to understand.
- Companies rush to list shares.
- Companies prefer to sell at a high valuation, not a low valuation.
By Roger Nusbaum, AdvisorShares ETF Strategist
Last week, the Wall Street Journal gave a rundown of what has been a very hot IPO market. The Journal reported that there were 42 listings in the first two months of 2014, compared to 20 from the same timeframe in 2013, and keep in mind 2013 was a very good year for IPOs.
Data was cited from Renaissance Capital LLC that as good as things are for IPOs, they are nowhere near 2000-era levels for listings or filings.
Of course, there are several investment products that target the IPO market, including the long-standing First Trust US IPO Index Fund (FPX), which has been a successful fund in terms of assets raised and performance (obviously, future results are unknowable).
The impact of IPOs is an important dynamic to understand.
One part of the equation is that IPOs represent the creation of new supply; supply of shares available for investment or speculation. During the buildup of the internet bubble, which arguably started with Netscape in 1995, the supply of (internet) equities increased at a remarkable pace, but demand increased at an even faster pace for almost five years.
As long as demand exceeds supply, then prices should be able to keep going up. Of course, eventually there comes a point where demand wanes for whatever reason, which by itself is a drag on prices, and if more supply continues to be issued, like in the early 2000s, then prices are likely to fall meaningfully.
Another building block of understanding of the IPO market is that companies prefer to sell at a high valuation, not a low valuation. According to Seeking Alpha, there were 32 IPOs in 2008 and 63 in 2009, compared to 42 that listed in the first two months of this year.
The IPO bubble of 2000 happened in 2000, the next time there is a huge market decline, it won't be the same as the tech wreck or the financial crisis of 2008, it will be something else, but assessing IPO enthusiasm can be useful nonetheless.
At any given moment, there is a list of bullish factors supporting the market and a list of bearish factors confronting the market. When the IPO market is subdued, it serves as a bullish factor, whereas a hot IPO market serves as a bearish factor. There are no absolutes, but enthusiasm for IPOs comes closer to the end than to the beginning of a bull market.