health of the IPO market
is one of many important indicators that tell us what's ahead for
Specifically, the quantity of the deals, the amount of capital
raised, and the performance of those newly public companies are
powerful data points.
For perspective, let's dial it back to the fourth quarter of
2007. A whopping 70 companies went public on U.S. exchanges. The
finishing flurry brought the yearly IPO total to 213 - more than
twice the tally of the ensuing two years combined. All told,
those 213 companies raised $48.7 billion in their IPOs - $6
billion more than any other year in the last decade.
We know what happened next. The U.S. economy tanked.
After the dust settled, it became clear that we had endured
the worst recession since the Great Depression. As a result,
stocks plummeted, with the S&P 500 dipping to levels not seen
in 12 years.
A second recession no longer seems likely. Despite some
lingering concerns, the U.S. economy has turned a corner and is
no longer on life support. However, the current IPO market is
looking an awful lot like 2007.
Sixty-four companies have gone public since the beginning of
May - the most in a three-month span since the fourth quarter of
2007. With 110 offerings in the first seven months of 2013, the
IPO market is well on its way to its busiest year since 2007.
Given what happened the last time IPOs went wild, that's not
necessarily a good thing.
Stocks are already precariously high. The S&P 500 is
trading at 19.5 times trailing 12-month earnings - the highest
valuation since January 2010. The market quickly recovered from
its recent 5.8% pullback, and is back to establishing record
highs on a weekly basis.
If the IPO market is any indication, another correction could
Growth stocks have gotten out of control. Each of the 110
companies that have gone public this year is either a small- or
micro-cap. Many of them are trying to cash in on record stock
market conditions. Given investors' appetite for risk these days,
recent IPOs are quickly escalating to ridiculous share prices
after their debuts.
Noodles & Company
is trading at 214 times earnings, after rising 139% since going
public last month.
, a 3-D printing company, is up a preposterous 247% since going
public in February despite never turning an annual profit.
Fervor over relatively unknown growth stocks is evident in the
13% average first-day pop for IPOs. That too is on par with
This isn't the tech bubble we saw at the turn of the century.
A full-on market crash probably isn't nigh. But this growth-stock
climate is unsustainable. Stocks can't keep rising forever
without hitting the reset button. And the correction we just saw
Most traditional indicators have been unreliable of late. A
stagnant unemployment rate didn't deter investors from buying
stocks. Sequestration and rising European debt have done little
to slow this bull market either.
Perhaps a frothy IPO market is the best evidence that a
correction could be coming. But that doesn't mean you should
panic. For many investors, a decent correction would be a welcome