“Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.
October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. The coming week is slated to bring a dozen more initial offerings, including Thursday’s expected $1.6 billion stock sale by Twitter Inc., the biggest Internet IPO since Facebook Inc. FB -0.10% ‘s $16 billion sale in May 2012.
The 190 U.S.-listed IPOs this year have raised $49.2 billion, more than the $45 billion raised by the 132 deals during the same period in 2012.
Container Store Group Inc. TCS +101.11% rose 101% on its first day of trading Friday, making it the sixth company this year to double in its first day of U.S. trading. There were eight such doubles in the previous 12 years, according to data tracker Dealogic.
The rush to buy shares of newly public companies is the latest sign of investors’ thirst for assets with potential upside, at a time when relatively safe investments are generating scant income due to tepid economic growth and Federal Reserve policies that have kept a lid on U.S. interest rates.
Many of these companies aren’t profitable. But investors increasingly are willing to roll the dice, particularly on technology firms that they say have the potential to “disrupt” the industry.
“After all these years of the market going up, investors are getting reacquainted with equities,” said Alan Gayle, senior investment strategist at RidgeWorth Investments, which manages $49 billion in Atlanta. “In a slower-growth environment, the newer names are much more likely to be disruptive. Disruptive companies are more likely to grow their top line at a fast pace.”
To some, the hunger for shares of newly public companies is a sign that the IPO market has begun to find its footing after five years in the doldrums, and could return to being a driver of growth for companies looking for capital to expand and hire.
To others, however, the demand is an indication that a rally fueled primarily by abundant liquidity from the Fed, and not by earnings growth and economic expansion, is entering dangerous territory.
“When I hear intelligent investors asking me not which companies are good to invest in, but which IPOs can I get into, it scares the heck of me,” said Mark Lamkin, a wealth-management adviser based in Louisville, Ky.
So far this year, 61% of companies selling U.S.-listed IPOs have lost money in the 12 months preceding their debuts, according to Jay Ritter, professor of finance at the University of Florida. That is the highest percentage since 2000, the year the Nasdaq Composite Index roared to its all-time high of 5048.62. The index closed Friday at 3922.04.
Investors this year are putting a higher value on debut companies’ revenue than at any time since the crisis. The median IPO this year has been priced at five times the past 12 months’ sales, according to Mr. Ritter. That is the highest mark since 2007, when the median ratio was more than six times.
Companies holding their IPOs in the U.S. this year have posted an average 30% gain in share price, according to Dealogic. That compares with a 23.5% advance in the S&P 500 index…..”
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