Is The IPO Market Drying Up?

By Joseph Nguyen | June 24, 2010 AAA

In the first quarter of 2010 the IPO market was quite active relative to 2009, with 27 IPOs in the U.S. market. In contrast, there was only one IPO in the first quarter of 2009. However, even with the pickup in IPOs, there have been some signs that the market may be drying up as investors' appetite for risk is quickly diminishing.

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IPOs in Trouble?
Just a few weeks ago, Bloomberg reported that the IPO for Noranda Aluminum (NYSE:NOR) only raised 30% of what they were hoping for. That poor demand for the IPO combined with the fact that Noranda stock is down over 11% year-to-date doesn't bode well for upcoming IPOs. (For a better understanding of IPOs, read our IPO Tutorial.)

Recent IPO Results
Initial public offerings (IPOs) are usually difficult to analyze because of the lack of historical information available. That is one of the reasons why returns on IPOs are relatively volatile after the date of offering. With that said, let's take a look at how some of the biggest IPOs in the trailing year have done since their initial offering:

Company Ticker Return Since IPO Date
Hyatt Hotels H +59%
Dollar General DG +42%
Verisk Analytics VRSK +38%
Starwood Property Trust HOT -8%
Dole Food Company DOLE -14%
Banco Santander (Brasil) SA BSBR -15%
Data retrieved June 17, 2010.

Hyatt Hotels topped the list in terms of return for an IPO in the past year rising by nearly 60% while Dole Food and Banco Santander (Brasil) both fell by about 15%. The Hyatt IPO was one of the largest in 2009, raising approximately $1.09 billion for the company with over 400 hotels around the world.

Despite its superb performance so far, analysts do not appear overly bullish on the stock. According to Reuters, four analysts rate the stock as a Hold while only two recommend the stock as a Buy. The caution from analysts may be due to the fact that the stock has run up in price in the last year, and many believe the stock to be overvalued. Compared to competitors like Marriott International, Hyatt trades at a premium right now.

Also, after experiencing pressure from a poor economic environment in 2009, Hyatt's most recent first-quarter results indicate that the demand may be picking up for higher quality hotels. In the first quarter of 2010, the company's revenue per available room (RevPAR) increased by 9.8% (8.1% excluding currency effects). The company's international RevPAR really came to life, reporting an increase of 18.7% (9.6% excluding currency effects). This was very encouraging news.

Bottom Line
Be cautious of investing in IPOs in this environment as the demand may be drying up. As well, be careful if you are offered a chance to invest in a "hot" IPO because often an individual investor's chance of getting in on an IPO is really small - that is of course unless none of the big investors want any. (For further reading on IPOs, check out The Murky Waters Of The IPO Market.)

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