Sept. 25, 2013, 10:21 a.m. EDT ·
CORRECTED
Will Twitter’s IPO mark the top of a bubble?
Commentary: IPO market is no where near as overheated as in late 1990s
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By Mark Hulbert, MarketWatch
An earlier version of this column
included an incorrect date with data on IPO records. It has been corrected.
CHAPEL HILL, N.C. (MarketWatch) — Though
Twitter’s upcoming IPO has rekindled worries that another dot-com bubble may be
forming, the new-issue market actually is nowhere close to being as overheated
as it was in the weeks leading up to the top of the internet bubble in March
2000.
That isn’t to say that there aren’t other signs that
exuberance on Wall Street may be approaching the irrational stage, as I
mentioned in a column last week. My argument in this
column is instead that you need not become even more worried just because
Twitter is planning on going public.
To put into proper context the contrarian significance of
a possible Twitter IPO, I turn to research conducted by Malcolm Baker,
a professor at Harvard Business School, and Jeff Wurgler, a professor at New
York University. Among the sentiment indicators they found to have forecasting
value, from a contrarian perspective, are two related to the IPO market: The
number of IPOs recently coming to market, and the average gain of those IPOs on
their first day of trading.
Take a look at the accompanying chart, which focuses on
the first of these two indicators. Notice that, while the number of IPOs coming
to market is higher this year than last, it’s nowhere near the levels seen in
the latter half of the 1990s. Nor, for that matter, are recent levels close to
what was seen in the early 1980s, when that decade’s bull market was taking off.
A similar story is being told by the second of the
professors’ IPO-related indicators. According to University of Florida professor
Jay Ritter, the average first-day pop for this year’s IPOs is 20%. That is only
2 percentage points higher than last year’s average, and only a fraction of the
70.9% average first-day pop seen in 1999.
Chrysler IPO filing triggered by bitter feud
Chrysler filed plans for an IPO as the auto maker takes its first step to return to the public market. The filing doesn't state a price for the shares or indicate how many will be offered.
As Ritter said in an interview, “the IPO data do not point
to an overheated stock market.”
Of course, it’s undeniably true that the greater number of
IPOs this year means the new issue market has become “hotter.” But that’s a lot
different than saying that the IPO market is so hot as to doom the broad stock
market. Even if the full-year total of IPOs this year is what I am
extrapolating, based on year-to-date numbers, the number of companies going
public this year would still be less than the comparable total in 20 of the last
33 years.
You might have thought that, since I am a contrarian
myself, I would react sympathetically to a contrarian-based analysis of
Twitter’s IPO. But, the way I look at it, contrarian analysis needs to protect
itself from sloppy thinking. If you’re going to go against the consensus, you
need an objective way of defining that consensus and sufficient historical data
against which to compare it.
Otherwise, all you’re doing is revealing your bias and
wrapping yourself in the flag of contrarian analysis to justify that bias.
Mark Hulbert is the
founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking
the advice of more than 160 financial newsletters since 1980. Follow him on
Twitter @MktwHulbert.
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