|
Published: October 2, 2009
This quarter, we’re all but guaranteed to
witness more companies go public than we’ve seen in the last
three quarters combined. That’s a prediction that isn’t just
significant for investors who want to buy shares of the latest
IPOs -- this latest trend in the public offering world could
mean serious profits for all penny stock investors. Here’s why
the biggest Wall Street bear just turned bullish on small caps...
Earlier this week, battery maker A123 Systems (NASDAQ: AONE)
commenced public trading of its shares, raising more than $340
million in the largest IPO of 2009. Those who got into the stock
early have been rewarded handsomely -- shares are up nearly +70%
right now. But AONE is only the latest in a string of initial
public offerings that capped off the biggest week in IPOs since
2007.
To be fair, that hasn’t been a difficult benchmark to beat.
Since the fallout from the credit crunch began, the IPO market
has deteriorated to the point where only a single U.S. company
went public in both the last quarter of 2008 and the first
quarter of 2009. Things heated up again last quarter with 13
public offerings, but those numbers still paled in comparison to
the 95 stocks that traded for the first time in the last quarter
of 2007. Now, with murmurings of the recession’s end upon us,
the bullish signals from an IPO resurgence shouldn’t be ignored.
Not everyone agrees with that prognosis...
“The fact that the many in the media are classifying three IPOs
as a resurgence is evidence of how low our expectations have
become,” National Venture Capital Association President Mark
Heesen said in a statement picked up by Reuters.
“[This] not the direction we hoped to see. While the psychology
of the market is trending positive, our original forecast of a
true recovery not beginning until 2010 still unfortunately holds
true,” he continued.
And while Heesen’s concerns about
the IPO market’s recovery have been
echoed throughout Wall Street this
week, it’s inaccurate to say that a
recovery in public offerings isn’t
happening right before us. At the
start of this week there had been 11
new public offerings in the third
quarter of 2009. That’s a huge
departure from the nearly
post-mortem IPO market that we were
in the midst of six months ago.
IPO bears lost more credibility on
Wednesday when Talecris
Biotherapeutics (NASDAQ: TLCR)
went public, breaking the year’s
domestic IPO record for the second
time this week. The biopharma stock
raised $950 million in its offering,
the biggest IPO for the sector since
2006. The Talecris offering comes
after China State Construction
Engineering Corp’s record-breaking
$7.34 billion IPO on the Shanghai
Stock Exchange, and a week ahead of
Banco Santander’s public offering
next week, which at $7.25 billion
will once again bust the year’s
record for the biggest
American-traded IPO.
What were the “experts” saying about
a dead IPO market until 2010?
And with some exciting companies
filing to go public in the coming
months -- including NewEgg.com
and Dollar General -- things
aren’t slowing down yet. To be
clear, a strong IPO market doesn’t
necessarily say much about stocks in
general. The S&P 500 has already
slumped -2% this week despite all of
the offering activity that’s
happening before us. It does bode
well for small-cap stocks,
however...
There’s a big argument going on
right now among the vast majority of
investors: some are claiming that
the market is perfectly primed for a
10 year bull rally, while others are
bracing for the next market
correction. But in the small-cap
world, things move very differently.
Every single U.S. IPO this year has
been a small-cap stock, which tells
me that the investment banking
syndicates -- which have some of the
most advanced market data available
-- are bullish on small-caps.
Why does IPO activity suggest where
the big investment banks are putting
their money? Studies by Nobel Prize
winning economists Franco Modigliani
and Merton Miller showed that,
historically, investment banking
syndicates and venture capital firms
will not push companies to go public
in a down market. That phenomenon
actually makes a lot of sense,
because in a bear market, investors
are willing to contribute far less
money to a stock’s underwriting
premium -- the “commission” that an
investment bank gets by selling an
IPO’s shares for more than they
paid.
By unleashing primarily small-cap
IPOs so far this year, evidence
points to growth opportunities in
the small-cap space.
So, how do you make a play off the
potential of penny stocks? Look for
small-cap plays that remain deeply
undervalued to capitalize on the
buying that’s going on right now.
That’s a more difficult prescription
than it was six months ago before
the market rally, but ignored penny
stocks still remain one of the last
vestiges of value right now.
It’s also important to keep in mind
that sentiment is prone to change.
While small-caps might be a favored
market space right now, a huge drop
in the rest of the market will
undoubtedly take penny stocks with
it. We’ll continue to watch broad
moves with our Small-Cap Recovery
Index for that very reason.
There’s little question that IPOs
are having a fantastic quarter, one
that will break records for the year
once all of the numbers are
crunched. And as long as the
industry’s experts continue to be
disappointed in the wake of
unrealistic expectations, most
investors will miss the growth
sentiment in small-caps. That makes
right now a perfect time to position
your portfolio. -- Jonas Elmerraji
Contributing Editor
Penny Sleuth Editor's Note: This
article originally appeared in
Penny Sleuth. |
