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Is the robust IPO market affecting the broader indices?

By: Nicole Urken | 04/10/14 - 03:53 PM EDT

Stocks in this article: GILDCELGBIIBREGNCRM

NEW YORK (TheStreet) -There has been a lot of debate of late about whether some of the pain in the so-called momentum names in the last month has something to do with growth money coming into the IPO space.

The momentum names in question? (1) The large cap biotechs like Gilead (GILD), Celgene (CELG), Biogen (BIIB), and Regeneron (REGN). (2) The cloud-focused names like Salesforce.com (CRM), Workday (WDAY), and Cornerstone OnDemand  (CSOD). And (3) The social media, search, e-commerce and entertainment cohort like Netlfix (NFLX), Facebook (FB), Amazon (AMZN), and Google (GOOG).

My view? In 2013, we saw one of the best years in the IPO market. 222 companies went public and raised $55 billion in what was the most active year since 2000, according to Renaissance Capital, the IPO authority. And in a strong year for the overall market, with the S&P up 29.5% and led by momentum names, the average IPO return was 40.8%. So why can't this dual-track profit continue?

A couple of things. First, with the market at new highs, there is more trepidation about stocks that have clocked in big runs. Even if some of the new IPOs are coming in at premium valuations or have limited (or no) earnings, investors psychologically don't like to feel like they missed a big run ... and would rather come into a new name. Second, investors have seen the outsized returns in IPOs-- including GW Pharma (GWPH), ChannelAdvisor (ECOM) and Marketo (MKTO)-- and want to repeat those returns. Third, we are seeing higher quality companies come public - real business models with growth- creating more demand for new names. And, fourth, the volume of IPOs is higher than ever before. Already this year, there have been 77 IPOs that have priced. That's up 114% from last year. And 122 IPOs have filed year to date, up 165% from last year. These have also been concentrated in the biotech and technology (cloud) space--pulling away capital from the public names in those two camps.

Ultimately, the continued new offerings of IPOs will continue to pressure the market because of the volume... and shift away to new names. In 1Q14, according to Renaissance Capital, the average total return of IPOs was 25.3%. Compare that with a flat market. That said, much of this came from a first day pop (20.3%) vs aftermarket average gain of 6.8% (which, while beating the S&P, was much less). Beware, too, that some of the names with big initial pops--like Coupons.com (COUP), Castlight Health (CSLT), Paylocity (PCTY), Q2 Holdings (QTWO), and Amber Road (AMBR), came down significantly in the aftermarket.... with older IPOs like FireEye (FEYE) getting hit on secondaries.

So what remains for the remainder of the year? Biotechs continue to be abundant, along with technology-- and the upcoming Alibaba deal is much anticipated. But key is watching how the newly minted companies perform in the aftermarket-- and if their momentum can be sustained... and to work alongside the more established names in each category.

 

--Written by Nicole Urken in New York.

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