Three Takeaways from the Recent IPO Flurry


In 2011, Greece dominated the financial headlines in the same way it is today.

That was the year it became apparent that the once-great European nation’s sovereign debt problems had piled higher than the Acropolis, requiring a 109 billion-euro bailout from the European Union.

The debt crisis wasn’t limited to Greece—Italy, Portugal, Spain, Ireland, Hungary and Cyprus also required financial help in one form or another at various points—but Greece was undoubtedly the face of a debt crisis that infected financial markets around the globe, including in the U.S.

Four years later, the Greek debt crisis has only worsened, once again weighing on U.S. stocks.

There is a notable difference in the IPO market this time around, however.

Only 125 companies went public on U.S. exchanges in 2011, the fewest of any year since the Great Recession ended in 2009. From August through October of that year, when Greece’s debt problems really deepened, there were only six total U.S. IPOs. This time around, however, the impact on the IPO market is far less profound.

IPOs are thriving in 2015, and have in fact picked up steam in recent months despite Greek worries dominating the Wall Street conversation. Just halfway through the year, 105 companies have already gone public on U.S. exchanges. There were 35 IPOs in June, more than any month in nearly 15 years. Another 10 are scheduled to price in the coming weeks.

Why the difference? It has very little to do with Greece.

Four years ago, Wall Street was still licking its wounds from the recession. Unemployment was still at 9% (it’s now down to 5.3%). Consumer confidence remained low. Banks were in the early stages of recovery. The Greek debt crisis was enough to rattle a financial market still fearful of a double-dip recession. Companies considering going public weren’t exactly chomping at the bit to jump into such a lukewarm pool.

Things have changed drastically since then. U.S. large-cap stocks have risen by an average of 14% a year in the last four years. The market has been up and down of late, but the long-term trend remains bullish. There hasn’t been a correction of more than 10% since August 2011.

So the climate has changed, and the fear of going public no longer exists. Greece may be dominating the headlines, but it’s not holding U.S. stocks hostage the way it did in 2011. That can be a sign of a frothy market, like when the IPO market exploded in 2000 just before the dot-com bubble burst. It’s too early to say we’re in danger of that just yet, considering 2015 is actually on pace to have the lowest IPO tally in three years in spite of the recent flurry.

In the meantime, there are real, actionable takeaways from all the recent IPOs …

1. Biopharmaceuticals are booming. I wrote a few weeks ago about how well biotechs have performed of late. And that’s spilling into the IPO market. Of the 36 companies that have gone public since the start of June, about half of them (17) have been biotechs. Many of them are performing quite well: Glaukos (GKOS), a maker of micro-scale surgical devices for treating glaucoma, is up 61%; ConforMIS (CFMS), a seller of customized knee replacement implants, is up 47% in less than two weeks; and Seres Therapeutics (MCRB), a clinical-stage company developing treatments for C. difficile infection, had the third-highest first-day pop since the dot-com boom.

Plenty of biotechs haven’t performed so well since their IPOs. But that’s to be expected in a sideways market—some winners, some losers. If this market ever breaks to the high side, biotechs are likely to lead the charge.

2. Wearable tech is still a hot niche industry. For evidence, look no further than the Fitbit (FIT) IPO. Fitbit, which makes wearable fitness devices that track daily activities, was the second-best IPO performer in June behind only Series Therapeutics, already more than doubling from its IPO price.

The fervor for Fitbit was immediate: the stock shot up more than 48% in its first day of trading despite pricing 33% above its expected IPO price—the highest pricing premium for an IPO all year. Fitbit’s debut comes almost exactly a year after GoPro raised $448 million in its IPO, and just a few months after Apple unveiled its highly anticipated Apple Watch. 

3. IPOs are crushing the market. Initial public offerings almost always perform well in bull markets. But the disparity between IPO performance and overall stock performance this year is unusually pronounced.

Companies that have gone public in 2015 have returned an average of 15% year-to-date, well ahead of the roughly 1% gain in the S&P 500. While IPO returns were better in each of the last three years, they were never more than double the return of the broad market. The last time stocks were having such an up-and-down year, in 2011 (when the S&P finished the year flat), IPOs took it on the chin, declining an average of 10%.

That’s another clear indication that the climate has changed. Investors are feeling bolder, and more willing to take risks—even in a sideways market.

Whether that means market is getting frothy remains to be seen. For now, certain IPOs might be worth the gamble for savvy growth investors.

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Cabot Wealth Advisory

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