After two years of hovering near death, the market for initial public offerings is finally healthy. That means you may soon get a chance to invest in such hot properties as LinkedIn and Skype, though you’ll have to wait a while longer to buy into Facebook.
IPOs are stocks sold to the public for the first time. Through mid February, 24 new stock offerings have hit the market, 11 more than in the same period in 2010, according to Renaissance Capital, an IPO research and investment firm in Greenwich, Conn.
Investors try to get in on IPOs before the stocks actually begin to trade because the shares are often underpriced relative to what they’re expected to trade for on the open market. This discount entices investors to pony up cash to buy the shares. However, IPOs sometimes rise only briefly — or don’t rise at all. They may even flame out.
Overall, it’s a good time to be an IPO investor. During the financial crisis and its aftermath, companies found it difficult to obtain financing. Now, there’s a large backlog of firms that seek to raise capital. Moreover, shares of companies that have gone public recently are selling at reasonable prices. “Buyers remain in the driver’s seat,” says Kathleen Smith, a chairman of Renaissance Capital. “If the company is offered at too high a price, the buyers go on strike until the price comes down.”
So far, big deals, as opposed to big first-day pops in the share price, have dominated the headlines. The $2.9 billion IPO of energy company Kinder Morgan (symbol KMI) on February 11, coming just weeks after Nielsen Holdings (NSLN), the TV-ratings company, raised $1.9 billion, shows that investors have an appetite for large deals as well as for the hot, young companies that usually make up the bulk of the IPO buzz.
The Kinder Morgan offering was the largest private-equity-backed IPO in history. In 2007, private-equity firms used debt to purchase the company and take it private, intending to later sell it at a profit. This kind of IPO offers the private-equity investors a way to cash out of their investment, while bringing to the market a company loaded with debt. The stock came public at $30 and closed at $31.05 on its first day. But it has done little since — it recently traded at $30.72 — and so it might be worth considering (all prices and related data are through February 22). The Houston-based company gets most of its cash from the publicly traded pipeline operator Kinder Morgan Energy Partners (KMP). It’s expected to pay a dividend that results in the stock yielding about 4%.
The question is, can you get in on the ground floor of a good IPO deal? Brokers typically offer shares to their best clients. These are usually institutional investors and individuals with substantial assets at the firm. Actually, if your broker offers you shares in an IPO, you might want to stay away — it may mean the big investors passed on the deal and the broker needs to dump them. Or to paraphrase Groucho Marx: “I wouldn’t want to buy into an IPO that would have me as a member.”
For the full story go to Kiplinger.com.