Investors shrug off volatility, risk to get in on IPOs

If increased market risk and volatility are supposed to hurt the initial public offerings market, somebody forgot to tell IPO investors.

“Even with the stock market near all-time highs, there is a lot of risk appetite out there right now, and the IPO market is benefiting from that,” said Josef Schuster, manager of the First Trust U.S. IPO Index Fund (FPX).
Historically, when the market is as volatile as it has been in recent weeks, large, high-profile IPOs have faced market resistance. But lately, it seems the IPO market has been adjusting on the fly, pricing offerings to fit market conditions or whatever narrow window the IPO market is showing.

“It seems like the IPO market is getting accustomed to shorter windows of opportunity,” said Jacqueline Kelley, advisory services partner at Ernst & Young.

“Over the past few years, market volatility has had a significant impact in shutting down the IPO market,” she added. “But some of the recent IPOs have charged right throw shorter windows.”

According to Renaissance Capital, 61 companies went public in the U.S. over the past three months, compared with 31 in the first three months of the year.

The first-half total of 92 IPOs compares with 73 for the same period of last year.

The total value of the second-quarter IPOs was $13 billion, up from $7.6 billion in the first quarter.

That first-half total of $20.6 billion is below the $28.4 billion in IPO proceeds during the first half of last year, but a key factor is that deals are still getting done during a choppier market environment.

“In the more volatile periods, investors are often expecting deeper discounts because they believe the pricing of the companies should go down,” Ms. Kelley said. “Right now, what we’re seeing is that the gap between what investors are willing to pay and what companies are asking has narrowed because both sides are willing to move.”

Two examples of larger pricings last week include information technology company CDW Corp. (CDW) and industrial distribution company HD Supply Holdings Inc. (HDS).

Both companies went public last Wednesday. CDW sold 23.3 million shares at $17 each, and HD Supply sold 53.2 million shares at $18 each.

Through midday Monday, both stocks were trading at least a dollar above their offering prices.

Perhaps the biggest hit of the quarter will turn out to be a company that went public on the last trading day of June, Noodles & Co. (NDLS).

The retailer specializing in noodle and pasta dishes, sold 5.4 million shares last Friday at $18, and the stock has since more than doubled.

“The performance of Noodles shows that there is risk appetite out there,” said Mr. Schuster, who also measures the market’s appetite through his mutual fund. Assets in the fund, which has a five-star rating from Morningstar Inc., have more than tripled to $90 million since the beginning of the year.

The fund gained 30.5% last year and is up more than 17% so far this year. By contrast, the S&P 500 gained 16% last year and is up nearly 14% in 2013.

“Investors are looking at IPOs to balance out portfolios because some of the traditional investments aren’t driving the returns right now,” Ms. Kelley said. “An IPO investment might be slightly riskier, but they can outperform.”

Related Topics: Initial Public Offerings (IPO)