The State of the IPO Market

Includes: CFX, EJ, GA, GNK, HUGH, IPI, JRJC, V
by: Zachary Scheidt

Since my fund concentrates on new issues (IPOs) and companies issuing additional stock, and my blog usually covers stocks that fit in this area, I thought I would share some insights on the syndicate calendar and how the dynamics are changing.

After six months of very little activity, April saw much needed liquidity finally hit the markets. Since many companies had been waiting for better conditions to offer their stock, there was a glut of supply that came to market once the window opened. Initially, there was plenty of demand to soak up all the additional supply and deals performed very well. Stocks like Colfax Corporation (NYSE:CFX), Intrepid Potash, Inc. (NYSE:IPI) and Visa Inc. (NYSE:V) all saw buying push their stocks significantly higher. Even more established names further away from their IPO’s were in demand. China names in particular such as China Finance Online Co. (NASDAQ:JRJC), E-House (China) Holdings Limited (NYSE:EJ), and Giant Interactive Group Inc. (NYSE:GA) saw their shares appreciate dramatically.

Now the initial wave of issuances are out of the gate and underwriters are in full swing. It appears that firms such as Goldman, Lehman and Morgan Stanley were smart enough to bring out the attractive inventory first which gives investors a better sense of security. Once several deals have been brought to market that worked, it is easier for them to convince clients to buy the additional inventory which may consist of stocks that are of lesser quality. At the same time, we are seeing the overall market running into resistance areas and the risk is higher for a decline. This paints an ominous picture for new IPOs and secondaries at this juncture.

Beginning last week it became especially clear that the quality of dealflow was deteriorating. Stocks such as Genco Shipping & Trading Limited (NYSE:GNK) and Hughes Communications Inc. (NASDAQ:HUGH) were sold at the peak of their intermediate term moves, and the new shareholders were left holding 10 to 15% losses almost immediately. It appears that at least for the time being, stock offerings will be met with selling. This presents an opportunity for shorting some of the names - especially those that have had strong runs but are overvalued and losing momentum. The shorting game is one that requires extreme concentration and discipline, so investors should use caution and make sure they fully understand the risks they are taking. But at the same time, opportunities in this area can yield quick profits.

So over the next few weeks, expect to see more short ideas in ZachStocks. The issue is not being bearish on the long-term fundamentals of our economy, but instead, looking to be opportunistic with the current dynamics and giving readers some ideas for hedging existing long exposure. I hope you find the next few weeks helpful and profitable.