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An IPO Market Bubble? Not So Fast… Money Morning

This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

This year has seen the busiest U.S. IPO market since 2007, with 199 companies already going public.

Their performance has investors fearing we’ve hit IPO market bubble territory.

Of the year’s 199 IPOs, 23% priced above their initial IPO ranges.

Through the first two weeks of November, 16 companies have doubled their initial public offering price. Six companies doubled their IPO price on the first day of trading alone.

Even in the worst month of the year (April) for IPOs, companies still posted an average gain of 13.6% on their first day of trading.

But the bulk of the “bubble” talk is fueled by the soaring valuations of this year’s tech IPOs…

The Tech IPO Market of 2013

Obviously there was a frenzy around Twitter Inc. (Nasdaq: TWTR), which opened at $45.10 per share – 73% higher than its offering price of $26. And that first-day surge occurred despite the fact that Twitter actually lost $133.9 million during the first nine months of 2013. That was up from a $70.7 million loss in the same time frame in 2012.

Now it looks like a slew of optimistic tech companies are ready to make a public leap in 2014. Companies like Spotify, Uber, Pinterest, and Box are rumored to all be eyeing initial public offerings – even without strong financials to support their valuations.

Pinterest, for example, is yet to make a profit, but still raised $225 million last month at a valuation of $3.8 billion.

Those high valuations based almost entirely on potential are why many are on the IPO market bubble watch.

But we’re not quite there…

Quality Control in IPO Market

“Tech IPOs have not even come close to entering ‘bubble’ levels,” Money Morning’s Defense and Tech Specialist Michael Robinson told his Strategic Tech Investor subscribers Friday. “Yes, the average year-to-date gain for a tech IPO is 60%. But that average also includes biotech stocks and is less than twice the overall market’s 31% gain.”

“That disparity may sound large but doesn’t even approach the vast gulf that you see in a true tech bubble,” Robinson said. “During the heady dot-com days of 1999, tech IPOs showed annual gains of more than 260%, a figure that was more than four times the 59% average for non-Internet IPOs.”

And according to Christopher Bartel, head of global equity research at Fidelity, there’s still a “quality control element” to this year’s IPO market. Major fund managers aren’t going after just any new IPO out there.

“We haven’t seen anything like this since pre-financial crisis, but I still think there is a lot of scrutiny being given to both deal valuations and also the quality of the companies,” Bartel told The Wall Street Journal. “Fidelity, like every other big institution, is taking our fair share where we say, ‘No, that’s priced too aggressively or we don’t think this company is ready for prime time.'”

Not every IPO has soared. Just look at online textbook rental company Chegg Inc. (NYSE: CHGG), which watched its stock stumble out of the gate, down nearly 23% in its first day of trading – from $12.50 to $9.68.

For every company that’s overvalued based solely on potential, there are still solid, well-established companies coming to market that should make IPO investors money.

What investors can do is avoid buying newly trading companies that don’t have strong financials supporting their valuations.

And remember – it’s not easy for retail investors to make money on IPOs – but there is a way to outfox Wall Street’s “Buddy System.” This report teaches you how to make money in the IPO market and avoid its pitfalls…

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