Risk abounds in hot IPO market

NEW YORK (CNNMoney.com) -- Companies are marching toward the public markets, leaving a trail of prospectuses detailing some risky investments for everyday investors.

Twenty-seven companies already have filed to go public halfway into the month of May. That compares with 30 filings for all of April, the busiest month for IPOs this year, according to Greenwich, Conn.-based Renaissance Capital.

The flurry of filings come amid a broad market rally that has boosted the Dow Jones industrials to record highs and the Nasdaq to its highest level in six years.

So far this year, companies listing on U.S. exchanges have raised a total of $18.3 billion, according to data tracker Dealogic. That compares to $15.3 billion in the same period last year.

"When the window opens, there is a rush to get through it because companies don't know when it's going to close or why," said Francis Gaskins, president of IPOdesktop.com.

But buried within the ranks of those waiting to go public are some big gambles, says Brian Hamilton, chief executive of Sageworks, a company that focuses on analyzing the performance of private companies.

"Companies are going out a little too early. It's definitely something that is really consistent across the board. The market is overheated, and the inventory is a little weak," he said.

A growing number of companies filing to go public don't have a track record of profitability, which by nature makes them riskier bets, he says.

Among the deals in the pipeline raising eyebrows is online travel company Orbitz, which filed with the Securities and Exchange Commission for a $750 million IPO last week.

The company's prospectus shows it has posted a net loss each of its last three fiscal years. The fact that it's operating in the red, along with the fact that private equity owner Blackstone Group has owned it for less than a year, already has some bloggers predicting it will be the worst IPO of the year.

Everquest, a financial holding company that also filed for a $100 million IPO last week, doesn't even have much of track record for investors to evaluate.

The company, which is partly managed by Bear Stearns Asset Management, owns a portfolio of collateralized debt obligations - complex financial vehicles that pool together often-risky loans and bonds - many of which have invested in securities backed by subprime residential mortgage loans.

Risk in the subprime market has increased as defaults have risen. Growing defaults among borrowers with the weakest credit roiled the mortgage market earlier this year and could pose more trouble down the road.

There are exceptions, of course, but overall, companies coming to market seem to be riskier than they were two or three years ago, Hamilton says.

And companies are likely to keep heading to the IPO market as long as the stock market keeps humming along. "These companies want to generate liquidity. If they can sell the stock, they're going to do it," he said.

Companies rushing to go public prematurely naturally draws comparisons to the tech boom of the late 1990s, when investors got carried away by promises of growth, but market watchers say investors are more vigilant these days.

"Investors are looking at top-line revenue growth, but they're still very rational," said Gaskins. "If companies don't hit quarterly projections once they go public, their stocks do get hammered."

Ethanol companies, for instance, were all the rage last year. Companies like Aventine Renewable Energy (Charts) and VeraSun Energy (Charts) dazzled when they went public but have been on a downward spiral ever since their market debut.

Investors like William Buechler, founder and president of California-based Barclay Partners Asset Management, say they're more willing to take their time when it comes to these sorts of fads and bubbles.

Buechler, whose firm invests in a variety of sectors, including alternative energy, says a trend similar to the ethanol craze is happening this year with solar companies.

But he's waiting for the wave of IPOs to pass before making a move. "We let the IPOs come, let the weak companies fall by the wayside and then buy the survivors," he said.