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Twitter, Hilton and Chrysler: Not Your Typical Late-Market Cycle IPOs

By Brian Egger of

NEW YORK ( TheStreet) -- Some market watchers have noted the tendency of lower-quality companies to complete IPOs during the latter stages of a bull market. If that observation is accurate, one wouldn't know it from the roster of big-name companies that have recently announced initial public offerings.

With the S&P 500 having registered an 18% gain during the first nine months of 2013, it's beginning to feel like a late-market cycle stock environment. Investors who believe the U S stock market's bull run is long in the tooth might be wondering what to make of the recent decision by several high-profile companies to jump on the IPO bandwagon.

I once discussed the merits of a particular stock offering with a portfolio manager, who groused about the tendency of "low-quality companies" to issue equity in the latter stages of a bull market. In such periods, strong equity valuations and favorable market conditions tempt many company executives and financial sponsors to raise capital through IPOs.

In 2002, The Journal of Finance published an article about IPO activity that echoed a similar viewpoint: "It is conventional wisdom among both academics and practitioners that the quality of firms going public deteriorates as a period of high issuing volume progresses."

If there is a connection between the buoyancy of stock prices and the tendency of lower-quality companies to go public, one wouldn't know it from the roster of companies that have recently announced IPO plans. Twitter, Hilton and Chrysler are among those expected to tap the public markets. "at a time when initial public offerings are red-hot," according to Wyatt Investment Research.

The strength of the current IPO market -- a beneficiary of this year's powerful stock price gains -- has also been a surprise to market watchers. In early 2013, CNBC predicted that "a volatile year for IPOs" in 2012 would pave "the way for a potentially meager 2013."

The CNBC story cited an academic article, entitled, "Where Have All the IPOs Gone?" That article pinned the reduced number of IPOs since 2000 to regulatory compliance costs, the demise of mid-market investment banks and incentives for companies to grow through acquisitions, rather than internal expansion. Advisory firm BDO began 2013 by predicting only a 6% increase in U.S. IPOs for the current year.

In hindsight, the 2013 IPO market has been anything but meager. According to Renaissance Capital, the first nine months of 2013 saw a 54% increase in the number of IPO pricings and a 66% increase in total IPO filings.

A solid year for IPOs has unfolded against the backdrop of a four-and-a-half-year-old bull market. In the wake of last year's botched initial stock offering by Facebook (FB), the public market debut of Twitter and other household-name companies has the potential to alter investor perceptions of the risks associated with new equity issues -- and hopefully for the better.

At the time of publication, the author did not own any of the stocks mentioned. Follow @breakingcall

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Brian Egger is the founder, publisher and gaming and travel analyst of During the last twenty years, he has held positions of increasing responsibility as a gaming, lodging and travel analyst at Goldman Sachs, Donaldson Lufkin Jenrette, Credit Suisse, BMO Capital Markets and Topeka Capital Markets. He also served as Associate Director of Research at BMO and Director of Research at the Institutional Research Group. Brian has held four team positions, including two second-place rankings, in Institutional Investor's Gaming, Lodging and Leisure categories. He has also been recognized as a six-time Wall Street Journal "Best on the Street" analyst. Brian taught securities analysis to MBA students as an Adjunct Professor in the Finance department of Columbia Business School. He received a BSE from the Wharton School of the University of Pennsylvania and an MBA from the University of Chicago Booth School of Business.

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