Trader Talk

Here's why the IPO market is a mess right now

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The IPO market is a mess right now.

The disappointing jobs report is not just a problem for existing stocks, it's a problem for companies that are trying to go public in the near future.

This didn't happen with the jobs report. The IPO market has been flashing a strong yellow light for months. The Renaissance Capital IPO ETF, a basket of roughly the last 60 IPOs, dropped nearly 20 percent in the third quarter.

And with good reason: returns have been very disappointing.

Sixty percent of IPOs that went public in 2015 are trading below their IPO price.

According to Renaissance Capital, average IPO returns were down 4 percent from their IPO price in the third quarter, the first negative quarter since 2011. More IPOs ended the quarter below their offer price than above it.

And the IPO market reacted: the number of deals was down 43 percent.

We're not starting off the fourth quarter very well either. Investors who have been burned this year are demanding price cuts, and they are getting it.

Five companies priced their IPOs this week (Peformance Food Group, Edge Therapeutics, Mima Therapeutics, Surgery Partners and NovaCure), and all five priced at least 20 percent below the midrange of the expected price.

Now we have two very leveraged companies that need money to pay down debt announcing terms for their IPOs.

In what may be the biggest IPO of the year (and the biggest since Alibaba), electronic payments processing firm First Data said it would float 160 million shares at $18-$20. And Albertsons, the no. 2 grocer in the U.S., said it would seek to float 65.3 million shares at $23-$26.

Both will likely price Wednesday Oct. 14 and trade on Oct. 15.

There are other big companies waiting to go public out there. Data storage firm Pure Storage will be the first pure tech company to go public since July, scheduled for next week.

This will be an important test. Investors love the company. It has wild growth. But it also has big losses.

After that, Nieman Marcus has filed but hasn't set terms. So has Univision. And Ferrari. And Petco. And McGraw-Hill Education.

While none have set terms, all of them are potentially in danger of going public at prices lower than anticipated.

That's good news for IPO investors. For example, Edge Therapeutics, after pricing at $11, well below the price talk of $14-$16, is trading today in the mid-$15 range.

The lesson: investors will buy if the price is right!

Bottom line: if market volatility continues, look for fewer deals, and those that do will have price cuts.

But if we get into mid-November, and the S&P is up 5 to 10 percent from today, you will see a VERY crowded fall schedule.