Will IPOs Continue to Soar in 2014?

Odysseas Papadimitriou is an entrepreneur who founded the personal finance websites WalletHub and CardHub. He previously served as a senior director at Capital One.

Didn’t it seem like there were a ton of IPOs in 2013? That’s because there was. More than 200 companies went public last year, including big names like Twitter, Potbelly, and Hilton, making 2013 the hottest year for IPOs since 2000.

But the real question you have to ask yourself is, why? Why did we see a rash of public offerings in the face of a lagging economic recovery and a flood of uncertainty gushing out of Washington?

The most likely explanation is pent-up demand. The economy had been looking so rough for so long that many of the companies that would’ve gone public years earlier under normal circumstances decided to wait for a good entry point. It ultimately came in 2013 as the unemployment rate began to fall, consumer optimism began to rise, and stocks soared.

“There is a lot of pent-up supply with issuers wanting to go public, some of it driven by private equity looking for exits,” Reena Aggarwal, director of the Georgetown University Center for Financial Markets and Policy, recently told WalletHub. “Investors are willing to once again take more risk. Therefore, this is a great time to go public.”

The trend has been exacerbated by the significant first-day bumps received by a number of recent high-profile filers. Shares of Twitter, for example, rose 70.7% on the first day of trading, while Sprouts Farmers Market and aptly-named Rocket Fuel surged 123% and 93%, respectively, upon making their market debut.

“We haven’t seen this kind of performance in a long time,” Aggarwal said. “I hope we don’t build-up another bubble.”

The current environment sits in stark contrast to just 20 months ago, when Facebook hit the market to infamous results. The stock closed just $0.23 above the open on the first day of trading after numerous technical difficulties. And while the IPO raised $16 billion, making it the third-largest in history, the tumult left a bad taste in the mouths of many industry insiders.

But what about the next few months – what do they have in store for the IPO market and our portfolios? That’s obviously impossible to foretell with any certainty, but the 66 IPOs we’ve seen in the past 90 days, according to IPOMonitor.com, is 144.4% more than over the same time period a year ago. The 38 IPOs expected for January 2014 are also 35.7% more than the 28 filings in Jan. 2013. Ultimately, however, pundits seem mixed as to whether we’re due for a correction or stocks will continue to rise in 2014. The same mixed opinions apply, in turn, to the IPO market, but the prevailing thought seems to be that 2014’s public offerings will not rival the class of 2013 in either number or mainstream appeal.

“The hot streak is over, except for some minor tech companies and small social-media companies,” says University of Louisville Finance Professor Russ Ray.

But while a shortage of inventory may foretell a relatively lackluster year for initial public offerings in 2014, entrepreneurship rates and the market’s fundamentals are all that really matter in terms of producing a consistent landscape for companies to raise equity in the public markets and seek growth.

“The outlook for entrepreneurship is very positive in 2014,” says Gina Colarelli O’Connor, professor of marketing & innovation management at the Rensselaer Polytechnic Institute. “The failure of the finance industry in 2008 has caused many people to turn to more value-creating options as sources of employment. Many young people with science, tech and math backgrounds opted to pursue advances in materials science, alternative energy, biotechnology, and information technology as ripe opportunities for new business creation and growth, rather than seeking employment in finance positions.”

This is undoubtedly good news for our economic future given that new companies create more jobs than established ones. However, it is at this point important to note that individual investors should look to IPOs for insight into the economy and evidence of new market trends, but not for buying opportunities. IPOs are generally a great deal for the select few institutional investors and high-net-worth individuals who are able to get in on the actual offering. Most people can’t access a newly-tradable company’s shares until they hit the retail market, however, and they’re usually quite expensive at that point.

Most investors are therefore better off ignoring the market’s hot new names, at least in the early-going. In fact, experts generally dissuade individuals from picking individual stocks to begin with, recommending a simpler long-term strategy for consistent growth.

“Avoid stock-picking and market-timing. You are not paid for that: money managers are,” says Marco Avellaneda, a professor of mathematical finance at New York University. “Think of the stock market as a ‘currency’ that you exchange for dollars and where you deposit your money. Be excited about Facebook, but don’t put your hard-earned money in one Internet stock which no one understands.”

Whatever your own strategy happens to be, make sure to concentrate on value rather than buzz in 2014 and it will undoubtedly prove to be a profitable one.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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