May was awesome for IPO investors. Thirty deals hit the market — only the fourth month in the past decade with that many offerings.
During May, the Dow clocked an impressive 4% return, which no doubt helped offerings — the average return for IPOs this month was an impressive 12.62%. Of the 30, only nine transactions had negative returns, with the worst being Ambit Biosciences (AMBI), falling 11.6%. A total of 14 deals had double-digit returns during the month, including Marketo (MKTO), which topped all other May IPOs by posting a gain of 86.8%.
And as you’ll see, there were a couple of sectors that had a very good time with May IPOs … and one that decidedly didn’t.
This sector has continued its winning ways. In May, there were three companies in the space that went public: Marketo, Tableau Software (DATA) and ChannelAdvisor (ECOM). Collectively, they did very well, posting a sizzling 57% average return.
What made these offerings so successful? Cloud companies leverage the Internet to deliver business software — which tends to lower costs and allow for real-time collaboration. The business model is also generally based on subscriptions, which means that revenues are fairly predictable — a plus for investors.
Of course, not all cloud companies are great. Wall Street looks for those that are addressing huge markets — say like Big Data (Tableau), ecommerce (ChannelAdvisor) and B2B marketing (Marketo) — and have major barriers to entry. Because these companies served such large markets, they posted better returns than we might expect from niche companies.
This was certainly an active sector, tallying six total offerings for the month of May.
That kind of activity makes sense given the strong rebound in the real estate market. Yet the actual performance of the IPOs has been lackluster. The only standout deal was mortgage provider PennyMac (PFSI), up a solid 21.3% … while the overall return for the sector was a disappointing 4.7%.
It’s not clear why investors backed off, but it could be the aggressive pricing of real estate offerings. After all, real estate is a highly cyclical business and companies might want to maximize their capital raises. But this often leaves little remaining for investors.
Since the financial crisis, this sector has been dreadful. But in May, signs of hope began to surface again.
For example, Insys Therapeutics (INSY) gained 38.88% and Portola Pharmaceuticals (PTLA) was up 28%. As always there were still some underperformers — Alcobra (ADHD), BioAmber (BIOA.UN) and Ambit Biosciences posted an average return of -10%. But in the wild biotech world, volatility is the norm.
The good news is that Wall Street is once again willing to take a flier on the next-big-thing.
Overall, May was a solid month for IPOs, especially for cloud companies. While anything can change in a day — much less a month — hopefully that momentum will continue into June.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.