GoDaddy Aside, IPOs Aren't What They Used to Be

By Markets Fool.com


Source: GoDaddy.

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The stock market closed the first quarter yesterday with mixed performance, as the Dow Jones Industrials posted a small quarterly loss for the first time in a year while the S&P 500 made a small gain to continue its nine-quarter winning streak. Yet even as the Dow and S&P remain near record-high levels, one indicator of investor interest in the market -- IPO activity -- has been markedly down so far in 2015, even as today's debut from GoDaddy has drawn significant investor interest and sent the stock soaring.

Why IPO activity has been sluggish
Initial public offerings tend to be a signal of froth in the stock market, as up-and-coming companies seek to cash in by bringing their shares to market when investors are most willing to pay up for them. That view is certainly consistent with GoDaddy's experience so far today, with the website-domain specialist having priced its IPO above its initial range at $20 per share and seeing the stock jump more than 30% as of 11:30 a.m. EDT.

From a big-picture perspective, though, companies simply haven't been coming public as much as they did in the past, despite the favorable market conditions. Only 34 companies went public during the first quarter of 2015, according to Renaissance Capital, marking the worst performance in two years. Moreover, capital raised through IPOs totaled just $5.4 billion, which was the lowest level since early 2011.

One reason for the apparent disconnect likely has to do with the particular stocks investors have the greatest appetite for right now. With many worried about a potential pullback in the stock market, investors have bid up shares of dividend-paying stocks to unusually high valuations, banking on their ability to protect them from the worst of any future downturn. By doing so, these investors expect defensive stocks won't fall as far as more speculative stocks, which in the past have tended to be more volatile.

Will IPOs bounce back?
Given that overall nervousness, it's hard for newly public companies to appeal to mainstream investors. Ordinarily, rising stock markets create investor euphoria, spurring an increasing number of investors to boost their risk tolerance and buy into small companies with high growth opportunities. This time around, though, the quest to protect hard-won gains seems to have led most companies to conclude that investors won't be interested in buying shares.

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The net result could well be that successful investors will have to reverse their usual investing strategies. If slower-growing dividend stocks are so popular that they're overvalued, then they will be more risky than cheaper, less in-demand high-growth stocks. That could eventually make IPOs and other high-growth small-cap companies more attractive, even after adjusting for their risk.

In the long run, companies need access to capital, and if cheap debt financing dries up due to rising rates, you can expect more IPOs in the future. For now, though, a lack of interest in initial public offerings could make deals like the GoDaddy IPO a rarer sight than usual.

The article GoDaddy Aside, IPOs Aren't What They Used to Be originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.