The IPO Game

There is nothing quite like the rush of a freshly priced company ready to take on the primary and secondary markets. IPOs can be dramatic, exciting, nerve-racking, prosperous, and even explosive for some. Recent IPO's like Beyond Meat, Inc. ($BYND) and Zoom Video Communications ($ZM) have seen gains since their IPO date of 257.4% and 149.94% respectively (as of the close 5/17/2019). Whereas Lyft, Inc. ($LYFT) and Uber ($UBER) have struggled to gain any sort of traction from a return perspective. For 2019, social media likely has you believing that the IPO market is similar to that of 1999 and 2000. However, when we drill down to the facts, it's not quite as black and white as you'd think. According to Renaissance Capital, there have been 57 total IPO's so far in 2019 which is down roughly 16% at this same time last year (May 19th).

The comparisons of the 1999-2000 market place start to take shape once we peek at the following tweet from JP Scott, CFA (@JackPScott)

According to Bianco Research, companies with negative earnings 1 year prior to IPO is currently sitting at 81%, exactly where we sat back on 12/31/2000. As interesting of a fact that this is, does it really mean anything at the end of the day for the direction of the IPO market? Or even the stock market as a whole? Let's find out and keep digging...

From a technical perspective, the weight of the evidence approach is generally the best response. So, logically the IPO Index ETF ($IPO) is a great place to start. J.C. Parets from allstarcharts.com recently tweeted that the IPO index is having issues with recent resistance. This supply and selling pressure is taking place near $31.50 and should be monitored for any sort of break to the topside.

The constructive nature that we believe J.C. is referring to is that a break to all-time highs would suggest market participants in the $IPO ETF are more willing to take on risk thus giving a more probabilistic situation for the overall market to experience this same trait. However, we are not necessarily seeing this 'risk on' characteristic at the moment...

A basic understanding of correlation can also help aid this discussion. We all know the rule in statistics, 'correlation does not imply causation', but for this exercise, it really comes down to getting a 'feel' for risk on environments, and even spotting possible divergence clues both positive and negative. Below is a 21-day correlation (over 3 yrs) snapshot between $SPY and $IPO from @KoyfinCharts. With not much surprise, these two have a positive correlation over an extended period of time.

A company that does not quite fall under the $IPO ETF yet (maybe someday) is Luckin Coffee, Inc. ADR ($LK). Luckin Coffee went public on May 17, 2019, at $17/share and looks to become a competitor to $SBUX, especially in China. @TradingNation recently aired a piece with JC O'Hara, Chief Market Technician at MKM Partners. JC argues that the real focus here should continue to be on $SBUX (not necessarily $LK quite yet) and the large consolidation breakout that has been underway throughout 2019.

“The stock has pretty much done nothing,” he said. “It’s been trading in a $12 range — $64 as the top, $52 as the low — and, often, when stock charts like these hibernate for an extended period of time and finally break out, that breakout is powerful and it can continue a lot longer than many people think is possible.”

Another key takeaway from the interview came from John Petrides, Managing Director, and PM at Point View Wealth Management. His take resides in valuation concern, mainly for $SBUX, as well as the ease of entry into the industry. We ask the question then, how will this fair for $LK, going after a prominent force in the coffee industry like $SBUX? Like most answers you'll get from a technician, price will be the ultimate 'tell' here, so let's listen to it.

The IPO game can certainly make your head spin, but every year more and more companies come to the market looking to make a splash with the investing public and of course investment bankers. The great thing about the market is, you are not forced into anything you don't want to own. Countless investors and traders will wait many months and even years before taking their chances on a company after the IPO, so do not be afraid to be patient. Heck, try your hand at the $IPO ETF first and see what you think. But remember, sometimes when you want returns from an IPO perspective, you just have to invest in pizza rather than the alphabet...

Have any questions, comments or concerns? Feel free to reach out to us!