Stalled IPO market shows signs of life

NEW YORK (CNNMoney.com) -- Much like the arrival of spring, the market for IPOs is starting to show some signs of life.

For starters, there was last week's debut of the online game developer Changyou.com (CYOU). It was the first public offering in nearly two months, and the stock soared 25% in its debut.

And considering that expectations are already running high for two firms set to go public later this month -- San Diego-based educational firm Bridgepoint Education and the language software firm Rosetta Stone -- this closely-watched corner of the market may be displaying the first signs of a recovery.

"I think these are the first bubbles in the lava," said John Fitzgibbon, founder and publisher at IPOScoop.com.

Investors had just about left the IPO market for dead during the past few months as they tried to seek shelter from the broader market turmoil.

Since August, only three companies have been taken public, including two so far this year.

Compare that to where the IPO market stood even just a year ago, when markets had yet to feel the full brunt of the financial crisis. Despite the nervousness that both preceded and followed Bear Stearns' collapse last March, 21 firms managed to make their debut in the first quarter of last year, according to Renaissance Capital's IPOhome.com.

Many experts cite the recent recovery in stocks for helping bring about nascent growth in the market for public offerings. Major gauges have been on a tear in recent weeks, with the Dow climbing 21.5% in the past four-weeks -- its best four-week run since 1933. Typically, the level of public offerings tracks conditions in the broader market.

But other troubles remain. Last week, the National Venture Capital Association warned that it may take a while before the IPO market recovers -- even if the broader market continues to improve.

That's because a dwindling number of companies have filed to go public during the downturn. At last count, only 84 operating companies remain registered with the Securities and Exchange Commission, according to Renaissance Capital's IPOhome.com.

"Once we begin to see a recovery, there won't be many companies prepared to take advantage of it, effectively extending the lackluster market until the pipeline rebuilds," said Mark Heesen, president of the NVCA.

But with the economy and corporate earnings remaining under pressure, a recovery is far from certain. That means only a fraction of the companies currently in the pipeline may actually make their debut.

Companies that operate in industries recognized as being "recession proof," including healthcare and consumer products for example, are particularly well positioned, experts said.

One such company was the children's nutrition product maker Mead Johnson (MJN), whose shares have gained 14% since they first priced at $24 a share in mid-February.

Some clean energy firms, which have enjoyed a surge of popularity in recent months, may also find their way to market before long, note experts.

But with investors still queasy, firms that are not doing extremely well aren't likely to go public, notes Sal Morreale, who tracks public offerings for Cantor Fitzgerald.

"In this environment you better have a strong balance sheet and good revenues," he said. "Wall Street is being very cautious."

And with new public offerings still just trickling in, that hasn't helped many beleaguered banks which count on underwriting fees from IPOs as a key portion of their investment banking business.

During the first quarter, revenues from public offerings globally totaled just $55 million, down 95% a year ago and the lowest total for a quarter on record, according to research firm Dealogic.

A recent surge of secondary offerings, in which an already public company issues additional stock, has helped to offset the IPO slump, though.

A number of established companies, including aluminum producer Alcoa (AA, Fortune 500), Wynn Resorts (WYNN), as well as smart phone maker Palm (PALM) and real estate investment trust Kimco (KIM), have all either raised funds or outlined plans to do so by issuing stock.

And with many banks still unwilling to extend credit, selling stock has become a cheaper way to raise capital than issuing debt, said Ben Holmes, head of Colorado-based IPO research firm Morningnotes.com.