Twitter Inc.’s impressive public debut can be summed up in less than 140 characters: The IPO market is back.
Shares soared 73 per cent on their first day of trading Thursday, underscoring what is shaping up to be a blockbuster year for initial public offerings.
The U.S. Federal Reserve’s easy money policies, plus the big gains by stock markets this year, have created a voracious appetite for new shares and made big first-day gains a regular occurrence. It has also created concern that investors may be paying too much for unproven stocks.
The number of IPOs in the U.S. has jumped 60 per cent to 193 this year from last year, the highest level since the tech bubble at the turn of the century, according to Renaissance Capital, an IPO adviser in Greenwich, Conn.
A similar upsurge is evident in the Toronto Stock Exchange, where IPOs raised $2.1-billion in the first nine months of this year, a dramatic increase from the $397-million raised in the same period a year earlier, according to PricewaterhouseCoopers.
U.S. IPOs this year have jumped by an average of 17 per cent on their first day of trading and newly public companies are outpacing the broader market.
The Renaissance IPO Composite Index, which measures the return of companies that have recently gone public, has gone up nearly 40 per cent this year, well ahead of the S&P 500’s 22 per cent.
Twitter’s huge first-day gain wasn’t even the best performance for an IPO this year. Six offerings have doubled or more on their first day of trading, including ones from sandwich maker Potbelly Corp., restaurant chain Noodles & Co. and Container Store Group Inc., a retailer of space saving gadgets.
That compares to just eight IPOs that doubled on their first day between 2001 and 2012, according to Renaissance Capital.
Adam Grossman, an analyst at Boston-based Middleton & Co., believes IPO investors have been encouraged by the strong rebound in Facebook Inc.’s stock. The social media giant’s share price tanked after its IPO but has since recovered to well above its IPO price.
“People are feeling like it’s safer to get back into the water,” Mr. Grossman said.
The strong IPO activity on Wall Street may bode well for markets here as well. “I think it says for Canada that 2014 will be a good year,” saidf Bruce Campbell, president of Campbell Lee & Ross Investment Management.
Others, though, caution against reading too much into the recent flurry. “It’s good to have more IPOs, I just don’t think you can read a strong economy into the number of IPOs,” Adrian Mastracci, portfolio manager at KCM Wealth Management. “The increase in IPOs tells me there’s a lot of cash around.”
He said his company doesn’t buy into IPOs. “We don’t get excited by the one-day wonders,” he said.
Jay Ritter, an IPO expert and professor of finance at the University of Florida, says his research shows that 62 per cent of recent IPOs have lost money for investors in the 12 months after their debuts.
“The main thing that’s going on is just a rising stock market,” Prof. Ritter said. “Whether it’s Canada, the U.S. or any country, a rising stock market results in more companies selling stock. In the U.S., all of the increase in IPO volume can be explained by a rising stock market.”
For now, the red-hot IPO market appears to be a welcome development for most money managers. A recent survey of 608 members of the CFA Institute, an association of professional investors, found that only 28 per cent see the recent IPO upswing as a sign of a bubble.
The peak for IPOs was in 1996 when there were more than 800 offerings, said Richard Peterson, a director at Standard & Poor’s Investment Advisory Services.
The market is unlikely to reach that number again any time soon. Mr. Peterson noted there that are fewer underwriters and banks since the 2008-09 global financial crisis.
He also notes that some IPOs are being done to pay back private equity debt, which was the case with the Container Store, while others are taking advantage of a market’s rise.
“It’s easier to complete an offering when the market is on the ascent then when it’s on the descent,” Mr. Peterson said.
Top first day returns since 2001
|Company name||IPO Date||IPO Price $||Return $|
|Qihoo 360 Technology||03/29/11||$14.50||134.5%|
|Sprouts Farmers Market||07/31/13||$18.00||122.8%|
|Noodles & Company||06/27/13||$18.00||104.2%|
Source: Figures in U.S. dollars. Source: Renaissance Capital