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Is the IPO Market Simmering Again?

Tuesday, 29 Apr 2008 | 12:57 PM ET

The recent success of two IPOs – Visa and Intrepid Potash – begs the question, is the market for initial public offerings heating up?

"I do think it's the beginning of a recovery, now that the market is stabilizing," says Scott Billeadeau, managing director at Fifth Third Asset Management.

Visa and Intrepid Potash have been the two real success stories. Investors who bought shares of Visa after their debut last month have seen the value of the stock jump 72 percent, and Intrepid Potash has gained 51 percent since it was priced last week.

But the pace of new offerings is still a trickle, and some analysts say don't draw any conclusions. All told, there have been just over a dozen IPOs so far this year, compared with more than 40 per month back in the heady first half of 1998.

The naysayers say Visa has done well because it's a household name and because shares of rival MasterCard have performed well. Intrepid Potash, meanwhile, timed it right, debuting when fertilizer stocks were hot.

Fewer Offerings Withdrawn

They also point to all the IPOs that have been withdrawn this year to further support their argument. But there's a little-reported fact: Right now, there are more than two IPOs being filed for every one withdrawn. This means there are at least 200 offerings in the pipeline, according to John Fitzgibbon, founder of IPOScoop.com.

"Now is a great time to really take the IPO market as a serious investment," says Fitzgibbon, who has been tracking the IPO market since 1972.

"We're still in the grips of a bear market and what does get out the door will be quality," he says.

For example, an offering for Digital Domain, a Hollywood special-effects studio that worked on movies including "Titanic" and "Transformers," was supposed to price last week but has been moved to "day-to-day" status as underwriters scramble to rustle up support.

It's not hard to figure out why: Digital Domain hasn't been profitable since 2005. Intrepid Potash, on the other hand, has seen demand go through the roof due to food shortages and ethanol production.

This may just be one of the positive effects of the credit crunch: A company coming to market is going to have to have solid revenue growth and be profitable -- or at least be on the cusp of profitability. There isn't room in the current environment for betting on the dream the way investors did during the tech boom.

On the Cheap

Not only will they need to have sound fundamentals, but they'll be priced at a discount, analysts say.

"It's like Macy's on a one-day sale," Fitzgibbon says. "They mark the merchandise down. If they said 'Everything marked up 20 percent!' you could shoot a cannon down the aisle and hit nobody," Fitzgibbon says. "Wall Street's no different – it's all marketing."

Some of the hottest IPOs coming down the pike are expected to be from energy companies and, while there aren't any agriculture offerings on the horizon, Fitzgibbon says it's just a matter of time before they start filling the pipeline, giving Intrepid's success. He's also noticed a few REITs starting to make their way in to the pipeline.

Pioneer Southwest Energy, a spinoff of Pioneer Natural Resources that buys oil and gas properties in Texas and southwest New Mexico, is slated to price 8.5 million shares on Thursday. That was down from a prior estimate of 12.5 million shares. The current range is $19 to $21. It is expected to trade under the ticker symbol "PSE."

On tap for next week is another oil name, Colfax, which makes oil and industrial fluid-handling products. Nearly 19 million shares, which are expected to trade as "CFX," are likely to price on Monday between $15 and $17.

Solar is somewhat played out, Billeadeau says, but one name on the horizon stands out: Real Goods Solar. This company, which is also expected to price Monday and trade under the ticker "RSOL," is different in that it doesn't make solar panels and other products. Rather, it focuses on the execution side of bringing solar technology to a home or building. Five million shares are expected to price between $10 and $12.

There are also a couple of Chinese companies in the pipeline, Billeadeau says, including China Resources, a conglomerate that does everything from processing meats and to operating supermarkets to owning a stake in container ports and making China's premium "Snow" beer. Four million shares are expected to price around $10.

The company had tried for a February launch date, but postponed the offering due to concerns about the U.S. slowdown. China Resources has seen its profits soar, and is ramping up its beer division ahead of the Beijing Olympics and the expected demand the games will bring.

"If the market gets more comfortable, you might see some of these things pulled out of the hopper and thrown in," Billeadeau says.

DigitalGlobe, which produces high-resolution satellite images for Pentagon as well as foreign intelligence and defense agencies, is another offering on investors' radar, given its stellar earnings. The IPO was just announced a few weeks ago; no price range has yet been set, but, the company estimated in its SEC filing that the offering could raise as much as $250 million.

Billeadeau advises investors to pick IPOs the same way you'd buy any stock. Criteria he uses includes gauging what the market is like for the company's business, its competitive advantage, and, most importantly, he says, it's management.

"The key of deals now is management," Billeadeau says. "Have they been successful and are they pricing it reasonably attractively?"

Fitzgibbon boils it down to two things to watch: The stock market and the SEC filing window.

"Focus on the stock market -- the tape will tell you the story," Fitzgibbon says. "The longer the Nasdaq holds above its March 10 low and can creep back up to the 2600 level, you'll start to see the IPO market develop."

"Right now, we have a market for IPOs, not an IPO market," Fitzgibbon says.

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