Why the Sizzling IPO Market Is a Massive Red Flag

I kind of thought that buying in the stock market was somewhat euphoric and based more on the Federal Reserve’s easy money policy than solid underlying fundamentals.

A good indicator of excess in the stock market is when initial public offerings (IPOs) surge by ridiculous amounts on their first day of trading. We have seen numerous IPOs surge this year as the bullish stock market sentiment has allowed a perfect environment for companies to go and raise capital. When IPO activity picks up and new issues surge regardless of the fundamentals, you have to wonder if the stock market is setting itself up for a subsequent sell-off.

Take a look at The Container Store Group, Inc. (NYSE/TCS), which more than doubled from its $18.00 subscribed price when it debuted last Friday.

Now you may think the Container Store is a high-growth technology stock. But it’s not—not even close. The company sells boxes, packaging materials, organization units, and small gift items. That’s it. The network includes 62 stores but is expected to expand aggressively. Again, so what? There’s no way this stock deserves to double on its first day.

When a seller of boxes doubles in one day, you have to step away and pause. The stock market euphoria on IPOs is unwarranted and clearly suggests the stock market has gone mad. Take a step back and really think about taking some profits off the table.

There was also the IPO debut of China-based e-commerce classifieds web site company Beijing 58 Information and Technology Co., Ltd. (NASDAQ/WUBA), or 58.com Inc., which some dubbed the “Craigslist of the Orient.” The stock surged over 40% on its first day as a public company. In this case, not only is the corporate name somewhat suspect, but the fact that a Chinese classifieds provider is valued at around $3.3 billion based on a $25.00 stock price is absolutely a mispricing by the stock market.

I thought the taste for Chinese stocks was not there. This spike in the price of 58.com was not justified. There are much better Chinese stocks that are already listed, and they are seeing little action.

Of course, can you imagine what it’s going to be like when social networking company Twitter, Inc. lists in early to mid-November? Trust me when I say it’s going to be absolutely insane when the stock debuts. There’s going to be a lot of happy investors out there who are able to get some of the stock at the subscribed price of around $20.00. And if the Container Store is trading at $36.00, could you imagine the surge Twitter will see? It could triple on its first day.

Again all of this IPO frenzy should be a massive red flag; it may be time to take some profits off the table.

This article Why the Sizzling IPO Market Is a Massive Red Flag originally published at Investment Contrarians by George Leong