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IPOs are lifting investor spirits, but not stocks

By Bernard Condon
AP Business Writer / November 20, 2011

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NEW YORK—U.S. companies are on track to post record profits this year. Stocks are cheap by some measures. And now even the hot IPO is back, handing riches to a lucky few and filling the rest of us with two emotions necessary for any bull market -- envy and greed.

It's enough to make you think stocks might recapture their April highs soon. But don't bet on it.

Angie's List Inc., the consumer review site, rose 25 percent in its public debut Thursday, more than double the average first-day gain for initial public offerings. It was the highlight of one of the busiest weeks for IPOs this year, a welcome break after almost no offerings for three months as companies pulled plans because of wild swings in the stock market.

"IPOs have recovered from their summer doldrums," says Jay Ritter, a finance professor at the University of Florida and IPO expert. "Good companies can go public again."

Most investors couldn't care less, however. The Standard & Poor's 500 fell 3.8 percent this past week, the worst since September.

In addition to Angie's List, seven companies made public debuts this week including Delphi Automotive PLC, a once-bankrupt auto parts maker, which slipped 3 percent on its first day. On Friday, Mattress Firm Holding Corp., a mattress retailer, had a first-day gain of 16 percent. Those sales followed a hot initial offering this month by Groupon Inc., the online coupon company.

The question now: Will a few successful offerings help convince companies that have delayed IPOs to go ahead?

A.B. Mendez, a stock analyst at the research firm Greencrest Capital, is hopeful. He notes that shares of Angie's List rose despite the fact that the company has yet to turn a profit and generated only $59 million in revenue last year.

"They've stoked excitement," he says of the recent offerings. "The bar for IPOs has come down."

While making it easier for iffy outfits to sell shares might sound bad, it could help break the logjam of planned offerings. Some companies are small with little or no profits, too.

The backlog totals 179 companies, according to Dealogic, a research firm. The companies hope to raise $30 billion selling stock. That's about as much as IPOs raised in the last six months of 2007, when the economy was still expanding and stock offerings were booming.

In the past, a hot IPO during dry spell has helped kick-start the market. In the summer of 1998, stocks tumbled after Russia defaulted on its government debt and stock offerings ground to a halt. Then, in September, a much-anticipated IPO of Ebay Inc. set the market afire. On its first day trading, shares of the online auctioneer nearly tripled.

By the end of 1998, 284 firms had gone public -- less than half the record 675 in 1996 but better than in most years. The S&P 500 rose 27 percent that year.

Earlier this year, 2011 was shaping up as the best year for IPOs in a decade. In April, Zipcar Inc., the popular online car rental firm, rose more than half on its first day of trading. The next month, LinkedIn Corp., the online professional network, doubled on its first day. Other popular offerings included Pandora Media Inc., the internet radio company, and Zillow Inc., the real estate website, whose stock rose 79 percent in its July debut.

In August, the IPO market collapsed. Stocks fell sharply as investors braced for a possible default by the U.S. government. That didn't happen, but then it began looking more likely that Greece might default. In September, no company went public. Even in the worst months of the credit crisis three years earlier, one or two companies managed to have initial public offerings.

For all the buzz surrounding IPOs, they may reflect optimism in the market more than they feed it. Ritter, the IPO scholar, argues that IPOs are bit players in the stock market, at least in terms of dollars they control. He notes that even in the boom years of the late 1990s, IPOs never raised more than $100 billion annually -- less than 1 percent of the total value of publicly traded U.S. companies.

His conclusion: Stocks are moved by larger forces than IPOs.

For now, that means Europe. On Thursday, as Angie's List was soaring, investors were selling nearly everything else. They were focused on news that government lenders were bolting from Spain, sending borrowing costs there higher. The S&P 500 fell 1.7 percent.

Still, there's no harm in hoping.

Among the companies that have filed paperwork with regulators to go public: Toys R Us, which hopes to raise $800 million, and online games creator Zynga Inc., which is aiming for $1 billion. And as Angie's List was soaring Thursday, another consumer review site generated excitement with a filing of its own. Yelp Inc. says it hopes to raise $100 million.