Big Winners Among New Issues,

But Not Many IPOs So Far In '08

BY Kevin Harlin

Investors Business Daily

May 14, 2008

Solar wafer maker ReneSola (SOL) found its place in the sun. Investors have rung up shares of Visa, (V) too. But despite those blockbuster IPOs this year, many companies have decided to stay private this spring.

It has been the slowest start of the year for initial public offerings since 2003. And the pipeline of new filings — a peek at what's likely to price in six to eight weeks — is also down, though not as sharply.

It's a buyer's market. Investors have been selective. Companies have been waiting for the mood to turn before testing the market themselves.

But the market is starting to show flashes of green.

Most of the stocks that have debuted this year are trading above their IPO price. That seems to be luring more filings, and easing the drought.

Many of the firms taking root are green-focused. In addition to ReneSola, there's a solar installer, a hazardous waste removal firm, and two wastewater treatment companies.

Sluggish IPO Market

"The filings are there. Although they're down from last year, they're not down (by the same degree as) the level of issuance," said Kathy Smith, of the Greenwich, Conn.-based firm Renaissance Capital, which watches IPOs. "So it shows there's interest."

So far this year, 30 companies have priced vs. 89 in the same span of 2007 — a 66% drop. But filings were down only 30% — 92 through Wednesday.

IPOs tend to track the general market. With credit tight and the economy sluggish, the major averages sold off hard through mid-March. "The credit tourniquet and the slowdown in growth, those are like double whammies," said Francis Gaskins, president of IPODesktop.com.

Investors also had doubts about startups' ambitious profit targets, further reducing their appetite for IPOs.

That dour mood won't last forever though.

Stocks overall have rebounded in the last two months. And investors have already warmed to many in this year's crop of new issues.

Renaissance's IPO index — a weighted index of the performance of recent IPOs — dived more than 20% in the first quarter, underperforming major indexes. But it rebounded 14.6% in April, its best month in its five years. That bested the S&P 500's 5.9% gain and the Nasdaq's 4.8% pop.

That should entice more companies to file, Smith says, creating another wave of public companies in six to eight weeks.

At the start of the year, most of the IPOs were special purpose acquisition companies, or SPACs — shell companies that come public to raise money for acquisitions. But those dried up in February as investors grew tired of the limited investor voting rights. Since then, a mix of finance, technology and energy firms have priced.

Visa Charges Ahead

The $17.9-billion Visa IPO was the largest in U.S. history. The credit card giant is now 87% above its March 19 offering price.

The agricultural boom made for fertile ground for Intrepid Potash. (IPI) The fertilizer maker shot up 57.5% in its April 22 debut. Fertilizer stocks peaked that day, so Intrepid has pulled back. But it's still 49% above its $32 offering price.

Another top IPO performer this year has been the Chinese solar wafer maker ReneSola. It's up 71% from its Jan. 29 launch. Shares rose 3% Wednesday after ReneSola blew away first-quarter views. Earnings and revenue growth were both in the triple digits and accelerating.

But the sun doesn't shine evenly. Residential solar installer Real Goods Solar (RSOL) drew a yawn from investors, pricing at $10 last week, the low end of its range. It's now 7.24, down 28%.

Jay Ritter, a University of Florida professor who tracks IPOs, said that since the market bubble burst in 2000, annual IPOs have never reached the high levels seen in the 1980s and '90s.

Smaller firms — with less than $50 million in annual sales — are scarce.

Increased regulatory hurdles — such as the Sarbanes-Oxley Act of 2002 — raise the costs for publicly listed smaller companies. But Ritter says that's not the whole story.

"Sarbanes-Oxley is partly to blame for this, but investors also have been disappointed with the poor performance of companies that have gone public too early in their life cycle," he wrote in an e-mail.

That raises the bar for filing. Some analysts were surprised that Real Goods made it to market. It had sales of just $19 million last year and has been just breaking even.

"If you can't show a good story of growth with positive cash flow — and most of them in the pipeline can't do that — it's going to be a tough sell," Gaskins said.

There are also fewer private equity deals, with companies going public, to raise funds to pay off the equity investor. Wall Street hasn't been too keen on those types of deals lately, Gaskins says.

But he says he hears whiffs of interest from companies. They're watching the market. Exactly when they'll strike though is anyone's guess.

"They may just be holding back, and waiting to come out in a more favorable environment," Gaskins said.