A hot market for initial public offerings may soon face a cooler reception from investors.
IPOs are having their best start to a year since 2000. Eighty-nine companies have raised $19 billion through sales of new stock so far in 2014. But demand for more offerings depends largely on the health of the broader market, and after last week's sell-off, the clamor from buyers may quiet down.
Auto financing company Ally Financial and hotel operator La Quinta Holdings had lukewarm receptions for their IPOs last week.
La Quinta priced its shares at $17 each, lower than its expected range of $18 to $21, which suggested less demand. The stock rose slightly in its debut Wednesday then fell the next two days to end the week below it original offer price. Ally, the largest IPO this year, priced its shares at $25 each, the bottom of its expected range of $25 to $28. The former financing arm of General Motors fell 4 percent in its premiere Thursday, closing at $23.98. On Monday, both stocks remained below their IPO price.
Some companies delayed their IPOs last week as the stock market turned bumpy. Paycom Software, a human resources software company, and City Office REIT, a real estate investment firm for office properties, were expected to launch. But their IPOs didn't happened and the companies are expected to try to complete them this week.
Andy Sanford, head of Wells Fargo Securities' equity capital markets group, who helped launch La Quinta, says that companies will have to lower their expectations on prices, although he thinks there is still good demand for new stocks.
“IPOs have been a place where investors have been able to get higher returns than the broader market,” Sanford says.
La Quinta and Ally were among 10 companies that raised $4.2 billion through IPOs last week. Another 12 companies are scheduled to launch stock this week.
The IPO market started recovering last year after being in the doldrums following the financial crisis and Great Recession. The Standard & Poor's 500 index surged almost 30 percent in 2013. That helped boost the appetite for new stocks as investors looked for ways to beat the market. Twitter, hotel group Hilton Worldwide and sandwich-shop chain Potbelly were some of the big-name IPOs in 2013.
Companies raised $61.9 billion through stock sales on U.S. exchanges last year, the best for IPOs since 2007. Prior to that, that top year was 2000, when companies sold $104.5 million of stock at the tail end of the internet bubble.
Investors have been drawn to the market because it gives them more bang for their investment buck. Stocks have looked more attractive than bonds, after bonds lost 0.4 percent last year, according to data from Barclays.
The FTSE Renaissance IPO index, which tracks the performance of new stock offerings for up to two years after their debut, surged 63.3 percent last year. That rise was more than double the 29.6 percent increase for the S&P 500 index. The IPO index is down 0.6 percent this year, less than the broader market's decline of 1.2 percent.
The appetite for IPOs is also being driven by established companies buying back their own shares just as demand for stocks is rising, says Russ Koesterich, chief investment strategist for BlackRock. That buying has reduced the overall availability of shares in the market.
“You've had a lot of supply taken out of the market in the last one to two years, due to all the buybacks,” Koesterich says. “So the IPOs are meeting a need for supply.”
Companies in the S&P 500 spent $475.6 billion on buying their own stock last year, an increase of 19 percent from 2012, according to data from S&P Dow Jones Indices. The strong pace has continued this year. Companies spent $129.4 billion on buybacks during the first quarter.
Last year's robust IPO market carried through to the start of this year. But signs of weakness have appeared as stocks become more volatile. Rattling the market are worries that technology and biotechnology companies have become overpriced after huge gains in 2013. The S&P 500 is down more than 2 percent this month after rising a combined 5 percent in February and March.
John Fitzgibbon, who runs IPOScoop.com, a website that specializes in tracking IPOs, says there has been a definite shift in investor sentiment as volatility increases. Still, he sees the shift as more of a pause for breath than an imminent slump. The economy is still improving and investors aren't in panic mode.
A lot of technology companies still want to sell shares and Chinese companies are eager to list in the U.S., he says.
One offering that could generate a lot of excitement is Chinese e-commerce giant Alibaba Group. The company said last month that it plans to go public on a U.S. stock exchange. The debut could raise up to $15 billion in the biggest IPO since Facebook's in May 2012.
“That's going to be spectacular,” Fitzgibbon says. “The show's not over.”