NEW YORK (AP) — A hot market for initial public offerings may soon face a cooler reception from
investors.
IPOs
are having their best start to a year since 2000. Eighty-nine companies
have raised $19 billion through sales of new stock so far in 2014,
according to Dealogic. But demand for more offerings depends largely on
the health of the broader market, and after last week’s sell-off, the
clamor from buyers may quiet down.
Auto financing company Ally Financial and hotel operator La Quinta Holdings had lukewarm receptions for
their IPOs last week.
La
Quinta priced its shares at $17 each, lower than its expected range of
$18 to $21, which suggested less demand. The stock rose slightly in its
debut Wednesday then fell the next two days to end the week below it
original offer price. Ally, the largest IPO this year, priced its shares
at $25 each, the bottom of its expected range of $25 to $28. The former
financing arm of General Motors fell 4 percent in its premiere
Thursday, closing at $23.98. On Monday, both stocks ended below their
IPO price.
Some companies delayed their IPOs last week as the
stock market turned bumpy. Paycom Software, a human resources software
company, and City Office REIT, a real estate investment firm for office
properties, were expected to launch. But their IPOs didn’t happened and
the companies are expected to try to complete them this week.
Andy
Sanford, head of Wells Fargo Securities’ equity capital markets group,
who helped launch La Quinta, says that companies will have to lower
their expectations on prices, although he thinks there is still good
demand for new stocks.
"IPOs have been a place where investors have been able to get higher returns than the broader
market," Sanford says.
La
Quinta and Ally were among 10 companies that raised $4.2 billion
through IPOs last week, the third busiest for debuts in 2014. Another 12
companies are scheduled to launch stock this week.
The IPO market
started recovering last year after being in the doldrums following the
financial crisis and Great Recession. The Standard & Poor’s 500
index surged almost 30 percent in 2013. That helped boost the appetite
for new stocks as investors looked for ways to beat the market. Twitter,
hotel group Hilton Worldwide and sandwich-shop chain Potbelly were some
of the big-name IPOs in 2013.
Companies raised $61.9 billion
through stock sales on U.S. exchanges last year, the best for IPOs since
2007. Prior to that, that top year was 2000, when companies sold $104.5
billion of stock at the tail end of the Internet bubble.
Investors
have been drawn to the market because it gives them more bang for their
investment buck. Stocks have looked more attractive than bonds, after
bonds lost 0.4 percent last year, according to data from Barclays.
The
FTSE Renaissance IPO index, which tracks the performance of new stock
offerings for up to two years after their debut, surged 63.3 percent
last year. That rise was more than double the 29.6 percent increase for
the S&P 500 index. The IPO index is down 0.6 percent this year, less
than the broader market’s decline of 1 percent.
The appetite for
IPOs is also being driven by established companies buying back their own
shares just as demand for stocks is rising, says Russ Koesterich, chief
investment strategist for BlackRock. That buying has reduced the
overall availability of shares in the market.
"You’ve had a lot of
supply taken out of the market in the last one to two years, due to all
the buybacks," Koesterich says. "So the IPOs are meeting a need for
supply."
Companies in the S&P 500 spent $475.6 billion on
buying their own stock last year, an increase of 19 percent from 2012,
according to data from S&P Dow Jones Indices. The strong pace has
continued this year. Companies spent $129.4 billion on buybacks during
the first quarter.
Last year’s robust IPO market carried through
to the start of this year. But signs of weakness have appeared as stocks
become more volatile. Rattling the market are worries that technology
and biotechnology companies have become overpriced after huge gains in
2013. The S&P 500 is down more than 2 percent this month after
rising a combined 5 percent in February and March.
John
Fitzgibbon, who runs IPOScoop.com, a website that specializes in
tracking IPOs, says there has been a definite shift in investor
sentiment as volatility increases. Still, he sees the shift as more of a
pause for breath than an imminent slump. The economy is still improving
and investors aren’t in panic mode.
A lot of technology companies still want to sell shares and Chinese companies are eager to list in the
U.S., he says.
One
offering that could generate a lot of excitement is Chinese e-commerce
giant Alibaba Group. The company said last month that it plans to go
public on a U.S. stock exchange. The debut could raise up to $15 billion
in the biggest IPO since Facebook’s in May 2012.
"That’s going to be spectacular," Fitzgibbon says.
"The show’s not over."
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