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IPO's: Looking for Bargains
2017 is shaping up to be a pretty busy year for initial public offerings (IPOs). Through June 30, 2017, there were 77 IPOs, raising a total of $20.5 billion, according to Renaissance Capital, a firm that tracks IPOs. This compares to only 42 deals that raised $6.2 billion in last year’s first half. The total capital raised year-to-date is already higher than all of last year. Also, activity is on track to beat last year’s 105 IPOs, although it is likely to be below the annual average of 168 deals since 2010.
What’s driving the renewed interest? Much of the credit goes to the enduring strength of the bull market. Investors are clamoring for equities, particularly those with open-ended growth prospects and potentially rapid price gains. Nearly half of the recent IPOs are in the healthcare/biotech and technology sectors, many of which produced very strong gains out of the gate. For example, UroGen Pharma has gained 84% since its offering in May. Broadly, most IPOs have produced good returns, reflecting the market’s enthusiasm.
Not all deals have been blockbusters: Blue Apron’s IPO in late June turned sour, with its share price down 35% (because of concerns that it is increasingly vulnerable to competition from companies like Amazon). Snapchat parent Snap’s debut has produced a 15% loss so far. Both companies are generating ever-larger operating losses with little chance of improvement--in effect, growing their revenues by selling their services below cost. Along with FitBit (down 72%) and GoPro (down 66%), these deals indicate to us that the market continues to show some discipline.
While many of the newly-public biotech and technology companies no doubt sell interesting products and services, their strong share price momentum and high valuations put them outside of our contrarian focus--and we suspect may not be sustainable. We sifted through the roster of IPOs since the beginning of 2016 looking for stocks that investors have bypassed. Often, if a company trades below its IPO price, called “breaking its deal price,” the market will thereafter shun the stock on that basis alone. Our August 2017 Turnaround Letter details six recent IPOs by companies with worthwhile products and services, reasonable valuations and share prices below or little-changed from their debut prices.