This has been a big week for me and I'm looking forward to a few days of rest, but before I go I wanted to put down a few important thoughts that I've been mulling over these past few days.
As you might guess, I spend a considerable amount of time thinking about the IPO market. While normally I do enjoy ripping apart the specifics of a particular offering, I find it interesting once in a while to step back and take in a slightly wider perspective. The IPO market in general is a constantly changing scene, and by watching the show closely it's possible to spot developing changes early and benefit from that knowledge.
Some of the things I've noticed lately are remarkable, some are confusing and others just scare the pants off of me. Here are a few of my thoughts:
First-day opening premiums are trending higher and higher.
Normally this is a good sign that only adds to the excitement and energy that make for a hot market. Lately, however, I'm beginning to view the super-premium deals in a more negative light. Remember that market risk and stock prices move in the same direction: The higher the price on a given deal, the more downside there is in owning that stock.
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This is especially troublesome when you have large numbers of daytraders stepping in to participate in an IPO in the first few minutes of trading. These buyers have little feeling for the stock, and usually are quick to bail out if things go against them. This is an avalanche you don't want to get caught in.
Deals are coming clustered in specific sectors.
This is one of those rare situations that actually make my job easier. I love it when there are very similar comparisons coming to market just days apart. The trick here is to watch the first of a group trade, then make a quick comparison with its queued-up cousin.
How do the revenue and earnings compare? How did the comp trade? Did it go higher over the course of the day? Did it pop, then fade? These clues can alert you to some wonderful opportunities -- or can save you some skin.
Companies are foregoing traditional venture capital sources and instead moving straight into the IPO as an early round of funding.
This, to me, is a very frightening trend and
I urge you to pay attention to the deals you are getting involved in
. I'm seeing more and more deals filed that have no revenue, have only recently been incorporated, and look simply to be opportunistic cash-outs by company insiders.
This happens when things get really frothy and buyers are just taking any and all deals offered to them. Don't fall for this: Watch for me to point out these stinkers in the upcoming weeks. I'm not very popular with the underwriters who bring this sort of dreck. But hey, they don't pay my salary, you do.
A war is brewing in the online brokerage business.
I've been thinking about this a lot lately, and I'm convinced that this is just around the corner. Online firms such as
are relying heavily on the allocation of IPO shares from the bricks-and-mortar firms as bait to attract new online customers.
What do you suppose happens when the bricks-and-mortar firms finally decide to move onto the Web themselves? What's the first thing they'll do to win back those customers? My guess is that E*Trade and Wit will see fewer shares in the deals and that the big firms -- which, by the way, essentially control the production of new-issue equities -- will slowly shut them out. I see IPO shares being used as a sort of currency to buy back business that has been lost to the online brokerages.
Those are my thoughts. What do you think? Let me know on the
You can expect me back here soon, rested and ready to triage next year's crop of equity offerings. Until then, have a great holiday.
Ben Holmes is the founder of ipoPros.com, a Boulder, Colo.-based research boutique specializing in the analysis of equity syndicate offerings. This column is not meant as investment advice; it is instead meant to provide insight into the methods of new and secondary offerings. Neither Holmes nor his firm has entered indications of interest in any of the companies discussed in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Holmes appreciates your feedback at