The IPO market in 2016 has struggled just as badly this year as last year. Only seven companies have debuted so far, the lowest amount since 2009. Companies have been scared off by a volatile stock market and by numerous weak performances from IPOs last year.

But there are indications that the IPO market is steadily recovering. And if that is the case, investors needs to be ready to be the first to jump on any companies which may break this IPO drought and start looking for investors.

Reasons for Optimism

While investors have every right to be extremely cautious about IPOs right now, some point to this drought being nearly over.

First, the S&P 500 has recovered and the stock has steadily increased over the past month. And positive economic news like the February jobs report can restore confidence to the economy and stock market, creating a better environment for IPOs.

It should also be noted that the Renaissance Capital IPO ETF is up 18% over the past month. Both of these are encouraging market signs for more IPOs to develop.

On the technology side, the recent financials reports released by Square Inc. and Box are encouraging. Both companies exceeded revenue expectations, with Square reporting a 49% increase in sales compared to the year-ago quarter.

This is important because no tech companies have debuted since Square and did in November. While Square's stock price of $14.50 or so is higher than its IPO price, it has fallen compared to its first day trading value. Square and Box, in addition to tech companies, have had difficulties convincing investors that their technological contraptions can actually lead to revenue and profits. While these revelations are not wholly positive (Square ended up losing more money compared to that year-ago quarter), the fact that tech companies show they can earn revenue should be an encouraging sign for other tech companies to join in.

Back to Basics

While caution is always advised, investors should actually try to jump in on the first IPOs which break this drought. The drought will discourage companies for whom an IPO would be more risky to wait until prospects are better. Those companies which do decide to go for an IPO anyways are more confident that they will be able to raise cash, and thus will have prepared their position to attract more investors.

But it is not like there will be a great deluge of companies breaking in at once. Instead, IPO droughts normally end with a few braver, more confident companies entering the waters and serving as a barometer for everyone else. That means that investors should have more time to do their research and be careful about where to invest in.

It is for that exact reason that investors should go back to basics and conduct their own research on prospective companies and what is good and not.

For example, what does a company intend to use the money for? Avoid companies which are in debt or who are selling stock because they need the money to fund their enterprises or pay off online personal loans. This eliminates many biotech companies, which often openly admit that they will never be profitable but insist that they need money to keep funding that cancer drug that may or may not pass FDA inspections in a few years.

Biotech IPOs have dominated the few companies which have gone public, but they should for now be largely avoided, especially since there are signs that the biotech bull market is at an end. Look at more low-tech companies, such as the delayed Albertson's IPO.

Investors should also pay special attention to underwriters, and be skeptical of any information about a private company which they come across. There are over 100 companies which have filed an S-1 form with the SEC, and some will jump in sooner than later. Paying attention to what numbers you can find, reading the prospectus, and staying calm will help investors find the proper IPO to invest in.

That will be all the more crucial as the day when the IPO market will recover is going to happen very soon.


This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.