It’s taken more than two decades to come back, but advisors are getting requests for hot IPOs again.
Yep, clients want to party like its the dotcom boom of 1999, even the ones that weren’t even born then.
Last week, shares of cryptocurrency marketplace Bullish (NYSE:BLSH) rose more than 200% from its $37 IPO price, to an intra-day high of $118, before paring gains to finish the day lower. The pop in the stock’s debut gave investors lucky enough to get shares the opportunity to cash in if they moved quickly.
Those that missed that brief window, however, are now seeing the stock closer to the $60 level. Still a home run for sure, but not the opening day grand slam.
Similarly, IPO shares of space company Firefly (Ticker: FLY) took off for the stratosphere before returning to earth earlier this month. And software firm Figma’s (Ticker: FIG) stock jumped 250% in its debut and now trades lower.
And let’s not forget stablecoin issuer Circle Internet Group’s (Ticker: CRCL) June debut, where it nearly doubled out of the gate before dropping - although not full circle back to its IPO price.
So given the current surge in IPO activity, how should advisors counsel clients who are clamoring for hot new issues without being fully aware of the longer-term risks?
Sean Beznicki, director of investments at VLP Financial Advisors, warns clients that the recent wave of IPOs may bring some big first-day gains, but those quick pops don’t always translate into lasting success.
“What really matters over time are things like steady revenue, room for growth, free cash flow, and how a company stacks up against competitors,” Beznicki said.
Ultimately, Beznicki leaves it to the portfolio managers of the funds he invest in to make the decision whether to get involved in a new issue.
Similarly, Austin Graff, chief investment officer at 49 Financial, says investors in IPOs need to be aware that over the long term, earnings and free cash flow drive the performance of stocks.
“While the excitement of a first-day pop may appeal to emotions, it tends to be more a result of a successful sales process than underlying fundamentals. For long-term investment, investors need to focus on the fundamentals,” Graff said.
For those undaunted by IPO volatility, Mike Martin, vice president of market strategy at trading platform TradingBlock, offers his own personal strategy of taking half off the table if he is fortunate to double his money on opening day, and letting the rest ride.
“Take Newsmax (Ticker: NMAX) for example. It IPO’d at $10, and within a day was trading over $200, a 20x increase. Today, NMAX is trading under $12. At some point, common sense suggests that a company can't be worth that much more just hours after its debut. Then again, common sense would have kept you from those outsized returns, which means you may need to factor in a dose of ‘irrational exuberance’ during the current bull market run,” Martin said.
Added Martin: “Retail investors are driving this bull market, and if retail is hyping a well-known, popular IPO, there is a decent chance it will outperform early on.”
As to which indicators or fundamentals he prioritizes when deciding whether a newly listed company is worth holding beyond its debut pop, Graff returns once again to the fundamentals: balance sheet quality - exhibited through low net debt levels - free cash flow, earnings, and return on capital.
“At times, we will own companies that may not look great today but have a clear path to improving fundamentals, but we won’t invest without a view on fundamentals,” Graff said.
As much as he enjoys watching the market’s recent IPO fireworks, Graff does not have a strong view on how much longer the momentum will last. In his view, the sustainability of the IPO boom will more than likely be driven by how much excess capital is available in the economy.
“Excess capital is generally driven by monetary and fiscal policy, which we have no ability of forecasting accurately. If monetary and fiscal policy remain relatively loose, we would expect the momentum to continue; if not, the window can close quickly,” Graff said.
TradingBlock’s Martin, meanwhile, is quick to point out that “nothing lasts forever.”
“The market’s years-long, inexorable rise will eventually slow or reverse, and when it does, today’s hot IPO market will cool fast. But that might be the best time to buy the IPO of a company you truly believe in, when others are on the sidelines. Long-term investors often make their most significant gains by buying when no one else has the cash or courage,” Martin said.
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