Are IPOs Back?


The number of IPOs filed in the United States dropped precipitously in the wake of Facebook's (NAS: FB) bungled offering this past May. In a typical June, an average of 18 companies go public. This June, only eight took the plunge.

If the end of last week is any indication, however, then the drought may be ending, as investors now have four new companies to sink their capital into. Discount teen retailer Five Below (NAS: FIVE) and biotech Durata Therapeutics (NAS: DRTX) listed on Thursday, while travel search engine Kayak Software (NAS: KYAK) and security-technology company Palo Alto Networks (NYS: PANW) began trading on Friday.


Offer Price

First Day Closing Price

First Day Performance

Durata Therapeutics




Five Below




Kayak Software




Palo Alto Networks




Source: Renaissance Capital and Yahoo! Finance.

The strongest indication that the IPO market is on the road to recovery is how well the listings were received by institutional and retail investors alike. With the exception of Durata, all of the companies priced either at the top of or beyond their anticipated ranges, with Palo Alto Networks exceeding its initial range by 13.5%. And without exception, every company closed higher on the first day of trading, with Five Below up an impressive 55.9%.

According to Renaissance Capital, a global provider of institutional research on IPOs, "[Last] week's IPO performance reflects investor preference for high-growth business models, particularly in the consumer and tech sectors."

This week provides further evidence of a recovery, with a slew of additional companies going public, including Mexican restaurant chain Chuy's Holdings, organic grocer Natural Grocers, and enterprise software company E2open.

Should ordinary investors buy into the IPO hype?
While this is good news for the market, ordinary investors should be careful before fully embracing the reinvigorated trend. As my colleague Ilan Moscovitz and I discussed in a recent series on IPOs, the deck is stacked against retail investors in at least two important ways:

First, insiders, underwriters, and their favored clients have access to more and better information than do ordinary investors. This gives them an unfair advantage over us in estimating a company's fair value....

Second, there's unequal access to shares. The initial offering is traditionally limited to preferred clients of underwriters. By the time we can buy shares, there's already been a significant markup. It's estimated that from 1990 to 2009, that markup averaged 22%, totaling $124 billion.

This issue is more pertinent than ever in the wake of the Jumpstart Our Business Startups Act of 2012, or JOBS Act. Under the auspices of job creation, the act eases the regulatory burden for the vast majority of companies going public and thereby makes it easier for the unscrupulous ones to commit fraud. Eliot Spitzer, the former New York attorney general, even suggested renaming the legislation the "Return Fraud to Wall Street in One Easy Step Act."

Until further notice, it'd be wise to avoid IPOs
For what it's worth, I would urge individual investors to avoid the IPO market altogether. At present, it's simply too tilted against us to provide the type of unbiased returns we expect from the market. Not to mention, given time to season, stocks can settle into a more stable, long-term valuation.

For a much better shot at market-beating returns, check out our newest free report about the stock you should buy instead of Facebook's. It's already up 66% this year, and has arguably just begun its ascent. To download this report instantly and for free, click here now.

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Fool contributor John Maxfield is wary of IPOs and accordingly does not have a financial stake in any of the companies above. The Motley Fool owns shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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