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A Stealth Bull Emerges in the IPO Market

Blackstone Group's public offering has drawn renewed attention to an IPO market that is on track for its best year since 2000.

Blackstone shares soared 13% on their first day of trading Friday. And though the stock has since traded below the offering price of the IPO -- which raised $5 billion and was oversubscribed by 10 times -- was nothing short of a success.

Some 108 companies have gone public so far in 2007, raising approximately $21.5 billion, according to Dealogic. The number of new offerings is up about 35% from the year-ago period when there were only 83 IPOs worth $19.7 billion.

"Based on the first half of 2007 the pipeline looks strong and we have got some great momentum," says Maria Pinelli, head of Americas growth strategy for Ernst & Young.

Nevertheless, the number of deals this year is a far cry from the speculative atmosphere of the late 1990s and early 2000s, when all the major indices were hitting historic highs. The all-time peak for the IPO market was in 2000, according to Dealogic, when a whopping $63.3 billion was raised from 214 issues.

And while that may seem peculiar given the record-breaking levels of today for the Dow Jones Industrial Average and the S&P 500, the once high-flying Nasdaq remains about 50% below its record high set in March 2000, when virtually any tech IPO was a hit.

Recent High-Flying IPOs Opening Day Gains

Company
Date of IPO
Day 1 Gain
Offer Price
Day 1 Close
Fortress Investment Group (FIG) 2/9/07 +68% $18.50 $31.00
NYMEX Holdings (NMX) 11/17/06 +125% $59.00 $132.99
Chipotle Mexican Grill (CMG) 1/26/06 +100% $22.00 $44.00
Baidu (BIDU) 8/5/05 +354% $27.00 $122.54

Rise in IPOs Mirrors Broad Market Rally

"As goes the equities market, so goes IPOs," says Richard Peterson, senior researcher at Thomson Financial. "We see the IPO market as very robust; we're standing almost at mid-year and we've had the best period since 2000."

"IPOs and the equities markets have a strong correlation," Peterson adds. "When the Dow was in the 7,000 range back in the first quarter of 2003 there were all but five IPOs being priced."

But when the Dow crossed 13,000 in May, 30 new offerings were floated, making it the second biggest month for IPOs in four years.

One stock in that group, specialty semiconductor outfit Cavium Networks , began trading on May 2 and has gained more than 53% since then.

Symbol
Price
 
Change
%Change
AER
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CAVM
---
FSLR
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JASO
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KBR
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NLST
---
OB
---
SPR
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Strike While the Iron is Hot

Unlike Google's widely criticized Dutch auction, which occurred amid an uncertain stock market environment in 2004 and ultimately priced below its original target price range, Blackstone's IPO is being spun out during a period of unprecedented global liquidity.

"This is their window of opportunity to go public," says Todd Schoenberger, director of brokerage at financial services firm USAA.

Market pros say there will be a steady stream of IPOs through the end of this year and into 2008, but the returns of this year's issues have yet to wow investors. IPO research firm Renaissance Capital says the average IPO debuting this year has gained about 9% from its offer price, mirroring gains in the broader market.

More than half of the new issues which began trading in 2007 have landed within their targeted price range; big returns posted by financial services firm FCStone Group, up 92% since March, and China-based alternative energy play JA Solar Holdings, up 68% since February, have been the exception rather than the rule. But the good news is that downside movers such as medical device maker XTENT , down 44% since February, have been limited in number.

Today's environment is a vast improvement upon recent years as negativity reigned and investors were skeptical regarding the quality of companies looking to go private, given the private equity and hedge fund worlds' appetite for risk, in addition to the potential regulatory risks due to Sarbanes-Oxley legislation.

"They didn't want to be here because of Sarbanes-Oxley and the liability that is at stake in the U.S." says Schoenberger. "Now people are willing to forego the liability risk, the Sarbanes-Oxley risk. But you still have to wonder how many companies would have gone public if it weren't for Sarbanes-Oxley."

While Blackstone may be a tough act to follow, Wall Street will be paying close attention to the debut of Man Group, a manager of hedge fund assets or "fund of funds." Man hopes to raise $4.2 billion when it goes public in July.

"As long as the Nasdaq is up and doesn't have a correction of around 10%, the IPO window is open and will remain open," says Francis Gaskins, president and editor of IPODesktop.com.

Biggest First-Day Gains in 2007

Company
Offer Price
Close Price
Day 1 Gain
Fortress Investment Group $18.50 $31.00 +68%
Accuray $18.00 $28.47 +58%
AeroVironment $17.00 $23.93 +41%
BigBand Networks $13.00 $17.00 +31%
FCStone Group $24.00 $31.13 +30%
Aruba Networks $11.00 $14.15 +29%
Capital Product Partners $21.50 $26.75 +24%
National CineMedia $21.00 $25.67 +22%
Optimer Pharmaceuticals $7.00 $8.50 +21%
Salary.com $10.50 $12.50 +19%
Source: Hoovers

Peter Kang is a markets writer for CNBC.com. He can be reached atpeter.kang@nbcuni.com

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