Since the investment world is all abuzz about the upcoming initial public offering of Twitter (TWTR), it seems an appropriate time to make some observations about the IPO market.
It has been a great year for IPOs. More companies have come public this year than at any time since 2007, right before the financial crisis. And the pace of the offerings and the enthusiasm from investors seem to be accelerating.
In recent months, Noodles & Company (NDLS), Sprouts Farmers Market (SFM), Potbelly (PBPB) and The Container Store (TCS) have all doubled off their initial offering prices. And now, to top off the IPO calendar for the year, we have the much-anticipated debut of Twitter.
To me, this accelerated activity points to the froth developing in some corners of the market. I would also be highly cautious about picking up these IPOs immediately after they hit the market. This is especially true if, like me, you do not generate enough trading commissions to receive an allocation of shares in these hot deals from your broker.
In general, I invest in only two types of IPOs. One is the "busted IPO." These are companies that come out with great hype but fall substantially soon after coming public as investors lose their enthusiasm for the shares, even as a company's business model remains intact.
An obvious recent example of this type of IPO is Facebook (FB). After debuting with much fanfare, the shares almost immediately tanked because of a glitch in bringing the company to market and as investors started to worry whether Facebook could make the transition to mobile. After coming public at $38 a share, Facebook shares soon tumbled to under $20 a share. Investors who wanted to bid $40 a share just before the company came public couldn't pull the trigger at less than half that.
The funny thing was there was nothing wrong with the company's business model, and the market soon learned that Facebook was indeed making the transition to mobile. Since bottoming just over a year ago, the shares have shot to $50.
The other type of IPO I will invest in the one that does not get much attention from the financial press during its debut. A perfect example of this type of IPO is Independence Realty Trust (IRT), which came public at around the same time as Sprouts Farmers Market did in August, but with much less notice from the investing public.
Independence Realty Trust owns 18 apartment buildings on Arizona, Colorado, Georgia, Indiana, Texas and Virginia that total about two thousand units. It is 60% owned by RAIT Financial Trust (RAS), which I consider well run and have in my income portfolio. Independence will use the proceeds to acquire several other properties at attractive cap rates. When completed, these transactions should bump its net operating income (NOI) 50% to 60%.
Another reason yield investors may not have found this income play yet is that dividends have been declared but will not be paid until later this quarter. At current prices, the trust will yield almost 7.5%. In its first quarter as a public company, Independence had 50% year-over-year growth in core operating funds. Apartment occupancy levels are strong nationally compared with historical levels, and I like Independence as a solid real estate play that pays a great yield and will also show steady dividend growth over the years.
One last comment about the current IPO market: The increased activity in this market is one more reason I am cautious about equity levels right now. Venture capital and private-equity owners are cashing out stakes at an accelerating pace, much like they did in 1999 and 2007. I doubt they are doing it because they feel the market is undervalued.