Is the IPO Market Overheating?

Is the IPO Market Overheating?

For years, initial public offerings inspired huge feeding frenzies among investors looking to buy shares of hot companies. Yet after the Facebook IPO, all that changed, and investors burned by Facebook's initially falling shares swore off the IPO market. More recently, though, big first-day performance from some initial public offerings in the past few months has investors getting greedy once more.

In the following video, Dan Caplinger, director of investment planning for The Motley Fool, looks at whether the IPO market is overheating once more. Dan points to some huge gains from recent IPOs, with FireEye rising 80% in its first day while Rocket Fuel and Foundation Medicine both posted gains of between 90% and 100%. Dan also highlights Sprouts Farmers Market , which climbed a whopping 123% in its first day as a public company.

In assessing those gains, Dan observes that all four of those companies are in industries that are popular for investors. Rocket Fuel offers digital advertising based on data analysis and artificial intelligence, capitalizing on the Big Data trend. FireEye provides cybersecurity services, an equally important commodity in the tech revolution. Foundation Health offers diagnostic tests that could change the way millions of patients get cancer treatment, while grocery-store chain Sprouts Farmers Market tries to take advantage of the healthy-food movement that has catapulted larger competitors to long-term success.

Dan concludes, though, with the observation that many IPO buyers just want stocks that they can't get from index funds and exchange-traded products. With a premium on novelty, investors have to be careful in avoiding hype and buying smart companies with long-term potential.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published