- The Washington Times - Friday, May 29, 2009


As I write this column, the stock market, as measured by the S&P 500, is down 1 percent for 2009 so far, but it is up nearly 34 percent since its early March lows.

Some are questioning the strength in the market amid recent sobering outlooks from such companies as Polo and Charming Shoppes, and the recent rise in interest rates. On the other hand, others take a longer-term view and will cite certain sectors as cheap, meaning that stock valuations remain compelling even after the market run-up. Most, and I lump myself into this camp, look for data points, be they economic in nature or more industry-specific, to gauge whether we are at a turning point in the market. In my opinion - while there is no silver bullet - a blended approach is often best when deciphering the tea leaves of the stock market.

One such indicator is the health of the initial public offering (IPO). As background, an IPO is when a company issues common stock to the public for the first time. In general, IPOs are completed by smaller, younger companies that are backed by venture capital and need more capital to fuel their growth plans. As many might remember, the IPO market was rather heady back in the Internet bubble period nearly a decade ago before it collapsed in late 2001 and 2002.

The IPO market has been rather quiet until recently. To put this into perspective, there were only six venture-backed IPOs in 2008 compared with 86 in 2007 and 56 in 2006, according to the National Venture Capital Association.

To be fair, the overall stock market performance in 2008, as well as company valuations, likely kept many IPO candidates on the sidelines. That being said, venture capital firms do need to monetize their investments, and with that activity having cooled dramatically, it hampers their ability to raise new capital and or make new investments. These firms invested just $3 billion in the first quarter of this year, a 47 percent decline from a year earlier. By comparison, 23 venture-backed deals have closed so far this quarter, compared with 84 venture-backed deals closed in the second quarter of last year.

Despite this, a fair number of people are wondering whether this is on the cusp of changing, given that in the quarter to date six IPOs have been completed. In April, Rosetta Stone, Bridgepoint Education and Changyou.com were priced. This was followed by DigitalGlobe, SolarWinds and most recently OpenTable. Of those six companies, five are now above their respective offering price with only DigitalGlobe having fallen below.

Last week, OpenTable, a company that provides an online solution that connects reservation-taking restaurants and people who dine at those restaurants, completed its IPO with an offering price of $20 per share. The shares climbed last week to a high of $34.68, though they have pulled back in recent days. The move in OpenTable’s stock price is intriguing considering the current economic environment and confirming data points that consumers have been trading down and eating at home more than dining out. Another concern that I have regarding OpenTable is the number of selling shareholders that are associated with the recent offering. In total, OpenTable priced 3 million shares; however of that, 1.6 million shares were offered by the company and 1.4 million were offered by selling stockholders. The question to ask is why would I want to be buying when so many people are selling, particularly after such a dramatic run-up in the shares since the IPO priced.

Judging whether the IPO market has truly turned will take more than a handful of deals to price and for that to occur more companies need to file to go public with the Securities and Exchange Commission. In the past two months, only two companies - Ellora Energy and Chemspec International - have filed to go public bringing the year-to-date number up to four. This is less than encouraging and follows a study published by Ernst & Young’s IPO Pipeline that showed 30 percent of the companies slated for public offerings at the end of last year had disappeared by the end of the first quarter of this year.

Eventually, the market will turn and we will see more IPOs; the question is how long until that time. I have no firm answer, but like most investors I will keep looking at the tea leaves to discern the answer.

At the heart of the IPO conversation is another query - whether IPOs are a safe play. The short answer is it depends on an investor’s risk appetite. For me, I have yet to invest in an IPO.

Some of my concerns include the lack of stock trading history for any IPO candidate, which makes it difficult to assess in terms of understanding how the shares will react to data points both positive and negative. For those looking to play the IPO market, a more balanced and potentially less risky way to play it may be the First Trust IPOX-100 Index Fund, an exchange-traded fund designed to reflect the performance of the U.S. market for initial public offerings. Another is IPO Plus Aftermarket Fund run by independent research and money-management Renaissance Capital.

Chris Versace is the director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] times.com. At the time of publication, Mr. Versace had no positions in companies mentioned, however, positions can change.

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