A Buyer’s Market for IPOs

If the performance of Tesla Motors on its first day of trading is any indication, the market for initial public offerings, moribund for much of the past two years, may be reviving. Shares of Tesla (symbol TSLA), an unprofitable maker of electric cars, surged 41% on June 29. What makes the jump especially noteworthy is that it occurred on a day when the Dow Jones industrials cratered 268 points, or 2.6%.

Tesla made the biggest splash, but others have also come to market recently with successful IPOs. One is CBOE Holdings (CBOE), the holding company for the Chicago Board Options Exchange, a market for trading listed stock options. Another is AutoNavi Holdings (AMAP), a Chinese maker of digital navigation systems for autos. They posted first-day pops of 12% and 8%, respectively. (In what may be the largest IPO ever, Agricultural Bank of China went public on July 6 on exchanges in Hong Kong and Shanghai, but not in the U.S.)

And IPO investors are anxiously waiting for Facebook to sell shares in what would almost certainly be the hottest offering since Google (GOOG) went public in 2004. A recent venture-capital investment in the social-networking stalwart values Facebook at a cool $23 billion, although the company says that it’s in no rush to go public.

Experts say now is a great time to dip your toes into IPOs. Unable to get loans from tight-fisted banks, many startups have had to sell stock to find the cash necessary for survival and growth. That can mean good deals for investors. A company may have to sell a large portion of itself to raise a certain amount of money. Or if it wants to limit the percentage sold to the public, it may have to accept a low share price. “It’s a buyers’ market,” says David Menlow, president of IPOfinancial.com, a Millburn, N.J., research firm.

Why should individuals care about IPOs? Because they give investors a chance to get in on small, fast-growing companies at the bottom floor. Companies can raise cash in the capital markets in one of two ways: taking on debt or selling stock. An initial public offering is the moment when a private company goes public. To generate capital, insiders, such as company founders and private investors, sell part of their ownership stake to stock-market investors. A company can use cash raised in an IPO to grow the business, pay down debt, give employees and insiders an opportunity to cash in their shares, or form some combination of all three.

Two kinds of investors buy IPOs: speculators, known as flippers, who sell after garnering a big first-day pop in the share price, and those who want to hold for the long term. Flippers long for the days of the technology bubble, when Internet IPOs rocketed more than 100% on their debut. Long-term investors search for the next Microsoft (MSFT). The software giant leapt 32% in its first day — and those who held until now have seen a return of almost 32,000% (despite the stock being down 42% over the past ten years).

Looking at the IPO Calendar

Bloomberg reports that in the second quarter, 91 companies filed with the Securities and Exchange Commission to sell $23.6 billion of shares. Some are familiar names, such as General Motors, hospital chain HCA, retailer Toys “R” Us, consulting firm Booz Allen Hamilton and Nielsen Holdings, the television-audience rating company. Most of these are formerly public companies that were bought by private-equity firms or, as in the case of GM, that essentially became a private company after being rescued by the U.S. government.

However, the best reason to buy an IPO is to partake in the growth of a small, young company, and the coming months promise some compelling opportunities.

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Source: .kiplinger.com

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