The IPO market still has some steam left.
Mixed results from a slew of initial public offerings over the past few weeks have left the market wondering if this is the beginning of the end of the 2006 IPO bonanza. While IPO performance is tempering from that of the beginning of the year, analysts say that institutional investors are still hyped for new issues.
"There is concern when stocks are unable to hold their IPO price. That is sometimes a warning signal to professional investors that the market can't absorb the new supply of stock and that prices are too high," said Marc Pado, chief market strategist at Cantor Fitzgerald. "But we haven't seen that environment here."
In 2006, a stock's price following an IPO rose, on average, 8.3% in the first day of trading, and 8.8% after the first two weeks, according to Dealogic. That compares to an 8% increase during the first day in 2005, and 7.1% after two weeks.
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"The IPO market is showing that it has a great level of fundamental strength," said David Menlow, president at IPOFinancial.com. "For the most part, the deals are quality offerings. We've been in a cycle for two and a half years that has been very, very solid."
New issuance has continued at a brisk pace through the second quarter, and many companies are poised to go public before the end of the year. Two boutique investment banks, Evercore and Keefe Bruyette & Woods, have recently filed for IPOs. Meanwhile, a number of companies are slated to debut next week, including Quatrax Pharmaceuticals, Luna Innovations and CTC Media.
"Right now we're looking at the pace, in terms of number of deals and dollar amount, as the fastest pace since 2000 in the U.S. market," said Richard Peterson, senior researcher at Thomson Financial. "And the number of filings has been accelerating."
Still, a number of high-profile IPOs over the past two weeks have had mixed results. Thursday,
was up over 10% after raising almost $2.4 billion. The deal wasn't a complete success, however. At $39, the company priced its shares below the low end of its $40-to-$43 range.
IPO didn't have a great market reception either. The company performed well in the first day of trading, up about 7%, but not quite as well as some other fast-food deals, including
. Since Burger King's first-day peak, the shares have fallen 8% to a recent quote of $17.33 on Friday.
Certainly investors who bought into the
IPO Wednesday would argue that the market is a flop, at best. Shares in Vonage have fallen more than 21% in three days, to a recent quote of $13.40.
Investors seem to be in accord about one thing, however: The performance of the Vonage IPO had more to do with the prospects for the company than the market itself. If anything, that thesis is supported by lack of institutional interest in the stock.
Retail investors were bombarded with phone calls Wednesday to see if they wanted in on the Vonage deal. In fact, Barry Ritholtz, contributor to
, said that he had heard from "brokers at 3rd and 4th tier broker-dealers who could 'get me into the IPO.' Aside from the fact that I don't do syndicate, the easy availability of a 'hot' IPO's shares suggests that perhaps it wasn't so hot after all."
He is probably right. Wall Street does have a tendency to take care of those who pay them the most -- the institutional investors.
"IPOs are a luxury," Menlow said. "It is still about who has the money, and the institutional investors are still calling the shots."
If the large accounts, such as
, want to get in on a hot deal, the stock will be scarce by the time the underwriters get around to selling to the retail market. If institutional investors don't want the deal, then buyer beware, because if they don't want it at pricing, they certainly won't want it in the first day of trading. The lack of demand will hurt the stock price.
"The individuals are waiting for the scraps of any offering," Menlow said. "People say Wall Street is beginning to have altruistic tendencies, but it's still about going where the money is, and banks take care of the people that will continue to generate them money."
For now, generally, institutional-investor interest in new stocks isn't subsiding, which gives hope to companies that are planning to go public later in the year. But if more IPOs begin to perform like Vonage and Burger King, there is reason for concern.
"Worsening IPOs say something about the market," Pado says. "If you are seeing it more and more across the board that IPOs are not holding their price, it's an indication that the market is closer to the top."
"If you don't have that follow-up subscription to the IPO," which ultimately helps the post-IPO performance, "then if shows that people feel that the stocks are valued too high."