While the IPO market can be rife with young, cutting-age companies, it also can serve as a pretty good barometer for the broader market. Think of it like a lab that allows investment bankers to test out new investment ideas.
So as IPO activity slows down for the end of the summer, now’s a good time to look at some of the trends for the year to get something of a reading about the rest of the markets.
The good news: Investors are fairly bullish, and those good feelings extend across many industries. The bad news: The environment isn’t total nirvana, and a few areas of the market are showing warning signs.
Last year, biotech IPOs were given up for dead, but investors can’t seem to get enough of ’em in 2013. Some recent transactions include Onconova Therapeutics (ONTX), up 66%, and Aratana Therapeutics (PETX), which has clocked a return of 50%.
There are a number of mega-drivers pushing this bull move. For one, the biotech industry is finally seeing the benefits of the decoding of the genome, and as a result, drugs are getting more effective and targeted.
There’s also a number of potential biotech buyers — companies like Pfizer (PFE) and Merck (MRK) need to fill their pipelines since their existing drugs have continued to come off their patent protections.
Still, investors can’t rush in willy nilly to every biotech company to hit the market. The risks are significant throughout the sector, as FDA trial failures are common, and many companies hinge on the fate of just a single drug.
Plus, as long as Wall Street keeps cranking out IPOs in the space, we’ll eventually see some lower-quality offerings.
We’re Tired of Homebuilders
The headlines are full of good news about a rebound in real estate … but oddly enough, IPO investors don’t share in the media’s bullishness.
Three homebuilders — Tri Pointe Homes (TPH), William Lyon Homes (WLH) and Taylor Morrison Home (TMHC) — are all below their offering prices. They’re not showing signs of slowing growth, but the fact is the homebuilder space is falling out of favor following a huge spike in valuations last year.
This could be an opportunity for investors eventually — at least for those who are willing to wait until the overall sentiment improves again.
When it comes to investing, Blackstone (BX) is one of the world’s best, and has demonstrated a great track record of timing market cycles … so if it’s selling assets, you should pay close attention.
Lately, Blackstone appears to be interested in unloading its hotel assets. It has already filed an S-1 for Extended Stay America, and reports have floated around that BX hired bankers to spin La Quinta and Hilton public, too.
The hotel industry has seen a nice turnaround as business and vacation travel has picked up, and construction of new hotels has been starved thanks to the aftershocks of the financial crisis.
But Blackstone doesn’t sell assets unless it feels valuations are getting bubbly.
Broadly speaking, the cloud space — which allows businesses to access applications via the net, making for easier installation and leveraging of data, and it’s usually a cheaper solution, to boot — has been a nice winner of late. Just ask companies like Workday (WDAY, +53% since IPO) and ServiceNow (NOW, +85%).
But the category isn’t a slam-dunk. Take ad-tech operators, for example — the IPOs of YuMe (YUME) and Tremor Video (TRMR) have been horrendous. Competition is tough, considering they’re up against well-heeled players such as Google (GOOG) and Microsoft (MSFT), plus ad-tech operators have difficulty making profits thanks to low margins.
That said, investors looking at making a speculative play still might consider the space for buyout plays. AOL (AOL) already has snapped up a major player, which could signal the start of a consolidation wave in the industry.
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.