On the surface, it's been nothing short of awful this year. Only 59 initial public offerings have priced, that's about half what it normally would be.
"The IPO market is half a heartbeat away from getting out the paddles," David Menlow of IPOfinancial.com quipped.
But IPO watchers are hopeful that the fall will see a flurry of activity, for three reasons:
- The markets remain near historic highs;
- IPO returns have begun outperforming the markets, and
- the presidential election will likely dampen activity in November, so companies thinking about going public might move in September and October.
Despite the dearth of IPOs, the returns on what has gone public have been improving. After lagging most of the year, the Renaissance Capital IPO ETF, a basket of the 60 most recent, largest IPOs, is up 8.3 percent this quarter, outperforming the S&P's 6.8 percent gain.
Bottom line: The IPO market has been lousy for issuers, but it's been improving for investors.
What are investors clamoring for in IPOs this fall? What they want is growth. Remember, this is an era where a lot of companies are growing earnings through financial engineering like buybacks but have no real revenue growth. Companies with revenue growth are in demand.
You can see this in the IPOs that have done best so far this year:
All tech companies, all with growth.
Let's look at IPO hopefuls for the second half. There is not much on the calendar, but there are roughly 100 companies that have filed a public S-1 statement and could go public fairly quickly.
Growth can be found in two sectors: technology and consumer.
- The Trade Desk: a real-time bidding platform for online ads. A tough space, but Q2 sales growth was 93 percent.
- Nutanix: data center storage; 90 percent revenue growth, but still losing money.
- Apptio: subscription service for CIOs to manage their technology; $140 million in sales, with subscriptions growing 30 percent a year.
Then there are several consumer companies with growth:
- Elf Beauty (it means eyes, lips, face): $213 million in sales, strong operating cash flow margins of 23 percent, revenue growth of 32 percent, compared with Revlon's 17 percent margins and flat topline growth. "The company appears to have hit a sweet spot for low-cost branded cosmetics," Kathleen Smith from Renaissance Capital told me.
- Yeti: high-end coolers. Coolers? I know, but look at these revenue numbers:
2013: $90 million
2014: $148 million
2015: $469 million
For the year to date, there is $608 million in trailing 12-month sales. For coolers? Yep.
Let's look at the rest of the pack:
- Strong brand names, slow growth. There are several mature companies with strong consumer brand names that generate solid cash flow, but not much in the way of topline growth. Two spinoffs are good examples:
a) Valvoline, a spinoff of Ashland Oil, makes automotive lubricates and operates 930 quick-oil-change centers; $1.9 billion in sales, with strong operating cash flow margins of 23 percent and no debt.
b) CBS Radio. The second-largest radio group in the country (after privately held iHeartMedia), 117 stations in 26 markets. Operating cash flow (EBIDTA) up a respectable 7 percent in the latest quarter, operating cash flow margins of 27.4 percent. Revenues of $1.2 billion were flat.
One hopeful sign for these type of companies: US Foods has had a respectable showing, up 7.7% since its May IPO.
- Slow growth with debt. Still out there, but a tougher sell, are companies with slow growth and a lot of leverage. Remember Albertson's? McGraw-Hill Education? Univision? Hard to grow in a slow-growth economy.
- Outliers. There's always a few names in out-of-favor spaces, and nothing is more out of favor than energy. Still, Noble Midstream Partners, a pipeline MLP formed by Noble Energy to own oil and gas gathering assets in Colorado's Denver-Julesburg basin, postponed its IPO last November, but has kept its financials updated.
- Likely out of favor for the moment: biotech. After a huge number of new offerings earlier this year, it is the worst-performing IPO sector in 2016. And after the huge stink we have seen around the EpiPen fiasco and drug pricing in general, biotech and pharmaceutical companies are in the line-of-sight of politicians. Biotechs in particular usually rely on very high prices for the specialty drugs they make. Throw in an election year, and it's a tough combination for any pharmaceutical company that wants to go public.
- Don't hold your breath: unicorns. They are not coming this year, at least not the big names. "These companies know how to get high private valuations, but without earnings it's going to be hard to support that in the public markets," Smith told me.
She believes it unlikely that Uber, Airbnb, Palantir, Snapchat, Pinterest, Dropbox or Spotify will see the light of day this year.