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IPOs 2000: An Endless Cycle of Profits and Opportunities
by Siu-Yee Ng
No matter how you look at it, the year 1999 has been a roller coaster ride for the IPO market.
Short-term traders generated unprecedented buying interest--which in turn is responsible for a growing instability in the new issues market. After all, short-term traders are the first to bail when the going gets tough.
The IPO market is intensely cyclical. If there's only a manageable number of new issues lined up, then generally many, if not all, will do well. Unfortunately, underwriters have been capitalizing on the initial feeding frenzy--and flooding the IPO market with new issues. Inevitably, short-term traders are frightened away when a number of IPOs perform badly.
Party like it's 1999
When the third quarter of 1999 started, the IPO calendar was manageable. Investors had recovered from the April-May 1999 selloff. On average, those IPOs that made their debut in the first few weeks of July soared 240% on their first day of trading.
Just take a look at our past weekly picks, like Internet search engine AskJeeves.com (ASKJ-NASDAQ) and Internet music software developer Liquid Audio (LQID-NASDAQ).
AskJeeves.com soared 414% on the first day and Liquid Audio opened 173% above the offer.
But the hype didn't last as underwriters brought more and more deals to the market and interest rate fears further scared away investors.
Here we entered into another cycle as we saw many deals open with little premiums. Some even fell below the offer price. By the end of the first trading day, 1-800-FLOWERS.COM, Inc (FLWS-NASDAQ) closed below the offer. U.S. Interactive, Inc. (USIT-NASDAQ) closed only 6% above the offer on the first day of trade. The returns in this cycle differed much from the earlier cycle.
By early August, many market watchers had forecast the end of the IPO market. But when the mainstream is wracked by fear, there are more opportunities for aftermarket buys.
In the aftermarket, timing is of the essence. And it should come as no surprise that the top aftermarket performers during the quarter debuted in late July and early August...
Down but not out
The new issues market did recover quickly with a less crowded IPO calendar and the perception that the Fed interest rate hike will be the last for a while.
By the end of August 1999, investors were once again jumping on the IPO bandwagon-- bidding stocks to obscenely high levels.
On average, first day gains were 240%. Our weekly picks have proved this to be true. Vitria Technology, Inc. (VITR-NASDAQ) closed up 202% on the first trading day and Kana Communications, Inc. (KANA-NASDAQ) closed up 240% on the first day.
A total of 140 IPOs debuted during the third quarter of 1999, raising a staggering US$19.4 billion. Quite a big stretch from the third quarter of 1998, when just 53 companies went public, raising only US$7.2 billion.
But I'd have to admit that 1998 may not be the best comparison, given the sharp market correction in October. Instead, let's look at the third quarter of 1997, when 105 deals raised US$9.8 billion. Or the third quarter of 1996, when 112 companies sold US$6.6 billion worth of stock.
Read on...
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