On the Comeback Trail
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When IPOs were trading at nosebleed valuations, everyone wanted to buy them. The Greater Fool Theory was very much in force. Somehow, there would be someone on the other end of the transaction willing to buy your shares at a higher price.
It was fun while it lasted. But of course, in light of Greenspan's tight monetary policy, it came to an abrupt end in 2000.
Of course, now no one wants to buy IPOs. Even great companies -- those with profits and great futures -- have had many troubles finding success in the IPO market.
However, despite this, the IPO market in 2000 was still vigorous. In all, there were 417 IPOs, in which a staggering $92.8 billion was raised. Last year, there were 511 IPOs with $74.1 billion raised.
But the collapse in Nasdaq during the fourth quarter was unbearable. A mere 30 percent of all IPOs for 2000 are trading above their offering prices. About 7 percent of all deals are trading below $1 per share. And, yes, most of these are Internet companies. Several even liquidated their operations, such as Pets.com.
True, investors are now much more selective. They want to see a clear business model and profitability. But interestingly enough, investors have not shied away from biotech and alternative energy IPOs. Of course, many of these companies are in the developmental stage and perhaps may never make any money. So, be wary.
The IPO market for 2001 will definitely have a slow start. There are only two deals planned for January so far.
Most likely, it will take until summer for the IPO market to gain momentum. By that time, Greenspan will have likely reduced interest rates and there will have been a rally in Nasdaq. More importantly, whenever the IPO market returns from a sharp downturn, the companies are typically high quality investments.