over 4 years ago • 3 mins
The steady flow of initial public offerings (IPOs) shows no sign of drying up, with the amount of cash raised in 2019 on course to match last year’s impressive total. And while some high-profile flops have captured the headlines (we’re looking at you, Uber), these newly minted shares have, as a whole, risen twice as fast as the overall market 📈
An IPO is the first time that a company allows you, the unwashed masses, to buy its shares 🧐 And like the equity market in general, post-IPO stock performance can be a mixed bag. But while most companies decline after their IPO, a handful of big winners can more than make up for those losses...
If you want to get yourself a slice of that sweet I-Pie-O, there are ways to buy the ingredients you need 🥧 Renaissance Capital’s IPO exchange-traded fund, for example, tracks the performance of debutantes to the New York market – and companies are automatically removed after they’ve been listed for two years.
But if you want to try to pick the individual winners, Goldman Sachs – the investment bank currently topping the league for introducing new companies to the US stock market – has some tips. In a report examining the performance of 4,500 US IPOs this week, Goldman looked for patterns around what makes a successful debut. Its conclusion: ignore the level of profits (or losses) in the first year after listing – what’s important is consistent sales growth of at least 20% a year, and profit in the second and third years.
1. Market sentiment is key.
American companies are on course to raise about $60 billion in IPOs this year, according to data from Dealogic and Renaissance Capital 💰 That would match last year’s total – the busiest for IPOs since 2014. It’s no coincidence that 2019 has been attractive for new listings: the stock market has climbed steadily and volatility has been muted (save a period in August when the VIX “fear gauge” jumped above 20). If that cozy backdrop vanishes, those IPOs might do too.
2. Priced to perfection?
The strong performances of this year’s top IPOs have left those companies’ valuations – the stock price compared with revenue and profits (if they have any) – stretched. That means their shares are liable to drop even if headline results meet analysts’ expectations, as messaging tool Slack, video-conferencing platform Zoom, and cybersecurity provider Crowdstrike found out this week.
It’s been hard to ignore politics this week here in London. Among many unprecedented events, Parliament successfully took control of the Brexit agenda from a new prime minister who says he wants Britain to leave the European Union (EU) on Halloween – come what may 😱 We may be entering a period when investors prefer the idea of a new government entirely over the uncertainty of one that’s happy to leave the EU without an exit deal.