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May 27, 2020
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In our August 2017 article about initial public offerings (IPOs), we wrote about the strength of the overall stock market, how this was supporting robust investor enthusiasm for IPOs, and how a large proportion of IPOs were in the healthcare/biotech and tech sectors.  This past April we commented about how the (then) upcoming IPOs would test value investors’ discipline, just as previous hot IPO markets reminded investors that IPO also stands for “It’s Probably Overpriced.”

History can teach investors how to interpret media commentary on stocks Here at New Generation Research, home of The Turnaround Letter, we are big fans of history. Not only do we find history fascinating in its own right, we have also learned that by understanding what has happened in the past we can better understand our current environment. And, perhaps more importantly, we can improve our ability to recognize and evaluate what might happen in the future. The famous quote, attributed to Mark Twain, that “history doesn’t repeat itself but it often rhymes,” captures this idea well.

Michael Jensen’s 1989 article in Harvard Business Review, “The Eclipse of the Public Corporation, was a ground-breaking view of private equity. While historical returns have been very strong, they are diminishing and may be even lower in the future. Private equity will continue to play a major role as a form of company ownership but won’t eclipse public ownership anytime soon. In 1989, Harvard Business School professor Michael Jensen wrote a ground-breaking article titled “The Eclipse of the Public Corporation1”. In the article, he put forth his belief that a new form of corporate organization, the “LBO Association” (in essence, private equity) would eventually become the dominant form of company ownership. He cited several advantages of private companies, most notably the major reduction in the agency problem, “the conflict between owners and managers over the control and use of corporate resources.” He added that private equity brings greater operational efficiency, tighter strategic focus and better capital allocation.

Turnaround investors must be especially wary of trendy sectors. Recently, this has been demonstrated by the dramatic implosion of several “green” energy companies, including wind and solar energy providers. We’ve seen dramatic falls from grace many times before. A few stocks, or a whole sector, catch the public’s fancy. Share prices skyrocket…only to come crashing back to earth a few months or quarters later. Solar power is simply the latest in a long list of fashionable sectors—after telecom, Internet and theme-based dining, to name just a few.