Back in July, I wrote an IPO update noting that private companies were going public in record numbers. The IPO mania has not subsided since then and reached a new peak this week with 12 scheduled IPOs, the most in a single week since 13 companies went public during the week of November 5^th, 2007. Not as frothy as the IPO craze during the Internet-bubble period at the turn of the century, but relatively frothy compared to the last few years.

A healthy IPO market is a two-edge sword. On the positive side, it means that cash is freely flowing and investors are willing to take on risk, which provides support for the stock market as a whole. On the negative side, it could be a sign of one of two things:

• unsustainable investor euphoria that sets the stage for a painful stock-market correction; or
• desperation by low-quality companies willing to sell out at any price prior to the IPO window closing because of a deteriorating economic conditions.

One anecdotal piece of evidence that leads me to lean towards a negative interpretation is the fact that the last time there were so many IPOs in a single week – November 5^th, 2007 – the S&P 500 was trading over 1,500, near its all-time peak of 1,576 reached on October 11^th. Subsequent stock-market action was, ahem, less than positive:

Source: Bloomberg

Given the European debt crisis, the likelihood of another U.S. recession, calls for the S&P 500 to fall to 800 in 2012, the current IPO deluge may not be a sign of good tidings. Time will tell.

On a performance basis, IPOs have severely underperformed the S&P 500 in 2011 and the underperformance has been even worse in the second half of the year:

IPO Underperformance in 2011

Three IPOs Priced, One IPO Delayed

The bad market conditions this week have caused one of the 12 companies slated to go public this week — specialty chemicals and metals designer Luxfor Holdings plc — to delay its IPO. But that’s the only delay so far. Three have already launched this week but with far different results. On Tuesday, social business software maker Jive Software (NasdaqGS: JIVE) priced above its indicated range at $12.00 and rose 25% on its first day of trading. Wednesday was a different story, however. Eagle Ford (south Texas) shale E&P company Sanchez Energy (NYSE: SN) priced below its indicated range at $22.00 and has fallen 9% halfway through its first day of trading. Similarly, Israeli shopping-center developer Gazit-Globe (NYSE: GZT) cut the share size of its offering by 25% and has dropped a dime below its $9 per share offering price (lowered from $12).  

Eight IPOs Still to Go

That leaves eight IPOs still on the docket, led by two widely-anticipated deals: Facebook social gaming company Zynga  (NasdaqGS: ZNGA) and luxury women’s handbag and apparel maker Michael Kors Holdings (NYSE: KORS). Both stocks are expected to skyrocket out of the gate but only one is quality (see below).

The full list of this week’s IPOs are listed below in descending order of anticipated market cap:

Bottom line: Consider buying Michael Kors and Laredo Petroleum on any pullbacks below their respective offering prices, but I’d avoid the rest.