IPO Menu Expanding as Investors Gorge on Health Care

Amid the prevailing uncertainty, IPO investors have been flocking to the safety of health care -- and little else. But as the sector grows saturated, analysts say the new-issues market could broaden out over the next few months.

Health care companies, which are considered resistant to economic slowdowns and generally have stable earnings growth, have dominated the IPO market recently. Of the six offerings this week, four are related to health care, and their performance so far has been impressive.

Staffing company AMN Healthcare (AHS), medical device maker Fisher & Paykel (FPHC) and health care consultancy Advisory Board (ABCO) all rose about 27% on their first day of trading. DJ Orthopedics, a medical device company with the proposed symbol DJO, is on tap for Friday. (TheStreet.com's Ben Holmes recently published a primer on the nuts and bolts of IPO investing.)

Odyssey Healthcare (ODSY), a hospice provider, has jumped 13% to $17 since its initial offering on Oct. 31. Cross Country (CCRN), another staffing specialist, has climbed a whopping 40% to about $24 since it went public on Oct. 25.

Inertia

Demand is still strong for these safe, reliable investment opportunities, and analysts say the trend is unlikely to change anytime soon.

"Despite the recent run-up, caution and uncertainty continue to dominate the stock market, so it'll be a while longer before the IPO market broadens beyond defensive industries like health care," noted George Nichols, an analyst at Morningstar.

Still, many sections and subsections of the health care industry have been penetrated now, and given the IPO market's cyclical nature, analysts are beginning to question how long the success can last.

Nichols said the list of recent filings isn't as narrow as it had been, and said this indicates "there will be more parity among industries in the coming months." He's looking for cyclical stocks to come back into favor as the stock market prices in an economic recovery. However, until the equity market broadens, "IPO activity is likely to be sparse," he said.

Another encouraging sign, according to Mark Baum, CEO of IPO.com, is that two companies outside the sector -- video game developer BAM! Entertainment and diet guru Weight Watchers (WTW) -- are going public this week. (Weight Watchers was priced Thursday at $24 and opened at $29.75.)

"This is the first spreading out we've seen, and it gives us some increased level of optimism," he said. "People are putting their toes back in the water and looking for other kinds of deals."

Momentum

One area that is expected to attract interest in the next few months is insurance. The group has already proven to be a safe haven, with Principal Financial (PFG) climbing 18% since its market debut in late October. The stock was last trading at $21.80. Meanwhile, Anthem (ATH) is up 27% from its first day of trade to $45.70.

The biggest and most anticipated deal this quarter will come from Prudential Financial, which is scheduled to price in mid-December.

"Due to its sheer size ($2.67 billion), it's going to make a huge splash. It should have a solid debut because it's a solid company, although a large offering like this won't score huge gains," Nichols said.

Companies that provide security services or defense equipment are also seen as potential winners in the IPO market, analysts say. These sectors have become increasingly popular since the terrorist attacks and are expected to benefit from increased government spending.

United Defense Industries, a company that designs and develops combat vehicles, naval guns, missile launchers and other equipment used by the Department of Defense, is slated to go public in December. NetScreen Technologies, which develops and sells firewall solutions, is tentatively scheduled to make its debut this quarter, although the timing is uncertain. The company will compete with the likes of CheckPoint (CKP) and Sonic Wall (SNWL), analysts said.

"We're going to see companies benefit from the change in focus," said Paul Bard, an analyst at IPO Plus Fund.

As for the technology arena, once a hub of IPO activity, analysts say there are a few companies that could attract favor. Despite a period of depressed demand, firms involved in improving the efficiency of the chip design process are doing well, according to Bard.

"They're actually seeing respectable growth in a market that's finding it hard right now."

Logic Vision (LGVN) was one such company that went public last week, though the stock is up a mere 1.6% from its debut and was last trading at $9.19. Magma Design Automation, another company in this space, is scheduled to go public next week and will compete with the likes of Cadence (CDN) and Synopsys (SNPS).

Surprisingly, about 20% of the 107 IPO filings this year have come from the technology sector, with 30% coming from health care, 10% from the energy sector and 7% from the financial group, according to CommScan.

Eleven IPOs are currently scheduled for the rest of the year, including the three remaining deals this week. Another 10 IPOs are tentatively on the cards, CommScan said. The fourth quarter will mark a pickup in IPO activity after a dismal third quarter in which just 14 new issues came to market. That ranked as one of the worst quarters since 1976.

"We're really waiting for the IPO market to not be so sector-driven," said Baum. "But in order for the IPO market to be healthy, the underlying market has to be healthy."