Why the Wave of New IPOs Could Be Bad News for Investors

new-iposSpark Energy (Nasdaq: SPKE) was a fitting name for yesterday’s lone initial public offering. The natural gas and electricity retailer’s debut may have “sparked” the biggest week for new IPOs since August 2000.
Twenty-seven other companies have lined up to price their IPOs in the coming days, according to the web site Renaissance Capital. If they all go public this week, that would be more new IPOs in one week than in any entire month of July in the last decade.
This year is already on pace to be the busiest since the turn of the century, at the height of the dot-com bubble. As of this morning, 167 IPOs have priced on U.S. exchanges in 2014 – already a higher tally than in five of the last six years. Eighty-three companies went public in the second quarter alone, the most of any three-month stretch in the past decade.
The sheer number of new IPOs is clearly a sign of the times on Wall Street. Stocks have been shattering record highs on almost a weekly basis all year, so the waters are historically warm for private companies wanting to jump into the public-trading pool.
But how many IPOs is too many?
Anytime you compare something to the dot-com bubble, it makes investors a little squeamish. Once that bubble burst, the market crashed and didn’t recover for three years. The 46% decline in the S&P 500 was nearly on par with the 48% drop-off during the 2008-2009 recession.
Is this many companies going public a sign that Wall Street has become the wild west again, and that stocks are headed for a similar comeuppance? Perhaps.
That said, there are some stark differences between the IPO climate now and at the turn of the century. For example, the average first-day return for IPOs this year has been a modest 14%. In 2000, IPOs popped by an average of 53% on their first day of public trading. Also, of the 10 IPOs that debuted last week, nine of them priced below the midpoint of their expected ranges, with an average “discount” of 22%.
So while the number of new IPOs is staggering, investor response to those IPOs isn’t nearly as out of whack as it was during the dot-com boom.
But pay close attention to the IPO market going forward. The recent pickup in activity could amount to one final push before stocks go south. It may be a perfect storm of companies rushing their initial offerings to take advantage of a fair-weather market before the clouds of a market correction form.

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