Time to Jump Back into IPOs

Today's first-time stock offerings are more sound, and the market is more sane, than back in bubble days.

By Anne Kates Smith, Senior Associate Editor

From Kiplinger's Personal Finance magazine, June 2005

After lying dormant for nearly four years, the market for initial public offerings revived in 2004 and will continue at roughly the same pace this year. IPO stocks in the first quarter were up 2%, on average; by contrast, the Russell 2000 index of small-company shares was down 5%. What's more, today's IPO market is more orderly than it was in the tech-bubble days, when favoritism often determined who could buy a new stock precisely at the start, before hype and manipulation sent share prices soaring.

Now, that's not so much of a problem. "Investors shouldn't worry about the IPOs going forward now," says University of Florida finance professor Jay Ritter, who has studied IPOs back to the 1970s. You can still take a flier (or a fall) on Internet upstarts like online-advertising service Fastclick, offered in April at $12 and recently trading at $10. But you can also turn to old-economy stalwarts. The top IPO performer for the first quarter of 2005 was coal company Alpha Natural Resources, up 20% recently from its February offering price of $19. FreightCar America, once part of Bethlehem Steel, is also well above its April debut price. Coming soon are IPOs for Warner Music, the third-largest U.S. recording company, and Lazard, the investment-banking firm.

More signs of sanity: Fewer first-day run-ups, many of which fizzled in the past. In 1999, the typical IPO popped more than 70% the first day of trading. Now, first-day gains average 7%. That's good news for individual investors, who usually buy after trading has begun. If you want in at the start, you may benefit from the increasing use of more democratic IPO auctions.

For example, Morningstar, the mutual fund and stock-research company, is following in Google's footsteps by using an online auction to price and allocate its IPO, scheduled for this spring. An account at one of the brokers selling the shares lets you bid at such auctions. A price of $14 to $15 would put Morningstar's value, as measured by profit margins, cash flow, earnings and the like, in line with competitors FactSet and Moody's, says Linda Killian, manager of IPO Plus Aftermarket fund, which specializes in new and recent IPO stocks.

If you buy stocks, you can increase your chances of IPO success by following a few rules. Stick to companies with at least $50 million in annual sales and whose initial offering is $25 million or more. And keep watching the stock. The best returns come within six months. You can find IPO information at Renaissance Capital's IPOhome.com and Hoover's IPOCentral.com.

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