Wall Street has never encountered a popular trend that it could not lead to excess. The past twelve months provide an excellent case study. With the underlying mood shifting from the Covid slump to the euphoria of growth, the stock market has become the place to be. Add to the rush of newbie investor excitement with the cash, and the stage was set.
Today’s IPO “boom” is diverse and widespread. Its “focus” is on investments that could produce an extraordinary return, apparently without undue risk. It’s right down the aisle on Wall Street – packaging stuff that looks good and looks safe.
Even the analytical context has shifted in favor of Wall Street. History has become everything. Earnings? Sales? A proven strategy? These things only limit the height of a stock. It was the wildly successful dream that became the popular trend – the driving force behind Wall Street memes stocks and IPOs.
The difference in today’s stock market that creates an abyss of risk
Unlike the exaggerated popular trends of the past which reversed and produced losses, this year’s reversals have been ignored. Losses continue to increase in number and size, but this rush to find the next best thing has kept investors and the media from looking back.
Well, the truth will come out. Every exaggerated mode of investing fails in the end. When this happens and is recognized, the consequences are serious.
Note: The negative effects of the IPO also put the rest of the stock market at risk. Bonds are a negative mood change for investors when stocks are valued for growth and success. Eliminate the sunny outlook for 2022, for example, and the long-term growth picture deteriorates, compounding the price effect. Also, at this point, the easy acceptance of negative gains will dissipate.
So, are we still there?
We are close because the amount of damage done is widespread. What adds a risk is that it will not be a “typical” bubble burst. This period is unlike any previous boom, including the pre-Great Recession real estate boom with its subprime credits and ARM option loans that Wall Street turned into bonds with imperfect high ratings. In comparison, this previous period looks tidy and neat.
Results of Wall Street IPOs issued since September 1, 2020
Below are the results of the 788 IPOs. The key metrics are performance since the start of 2021 and distance from the 52-week high. Note also the absence of positive profits from companies listed on the stock market.
(Data source: Financial visualizations – FinViz.com)
(See the addendum for additional information on the IPO and stock charts)
Health – Biotech companies
- 84 IPOs, only two of which have positive results
- The median return since the start of 2021 is (40)% loss, and only 16 out of 84 have a gain
- The median position below the 52 week high is (55)%, and 74 of 84 are worse than (20)%
Technology – Software Companies
- 53 IPOs, of which only five have positive results
- The median return for 2021 since the start of the year is (2)% loss, and only 20 of them have a gain
- The median position below the 52 week high is (32)%, and 37 of the 53 are worse than (20)%
Everything else (apart from PSPCs)
- 191 IPOs, of which only 33 have positive results
- The median return since the start of 2021 is (9)% loss, and only 73 out of 191 have a gain
- The median position below the 52 week high is (33)%, and 131 of 191 are worse than (20)%
Finance – Acquisition companies with a specific vocation (AKA SPAC or shell companies)
- 460 IPOs, all with negligible profits as investors await news of the acquisition
- The 2021 median return year-to-date is (3)% loss, and only 69 out of 460 have a gain
- The median position below the 52 week high is (8)%, and 72 out of 460 are worse than (20)%
SPAC fashion is dead for three reasons
- Revitalized SEC focuses on PPCS, ensuring Wall Street and public companies follow full disclosure, no-exaggeration, and government securities rules.
- The collapse of virtually every SPAC price down to the IPO price of $ 10 proves that the high returns implied by the dazzling acquisitions were wrong (344 out of 460 are now trading between $ 9.50 and $ 10; 89 are traded between $ 10.01 and $ 10.50)
- Bill Ackman’s PSPC missteps and failures are proof that the PSPC craze has reached its limits
The bottom line: here are emotional sales
Nothing reverses a trend like a reversal of fortune. Savvy investors know this is happening and watch for signs of leveling off. However, reckless investors take the emotional path attached to some things that go wrong:
Denial (buy more) – supported by periodic increases in the downtrend
Anger (short sellers!) – caused by sudden and sharp selling to new lows
Negotiation (if I can just break even I never will …) – a break in the downtrend, mistakenly interpreted as a new foundation, produces hope
Depression (sell everything) – fear replaces hope as prices drop to “inconceivable” levels
Acceptance (from the lesson learned) – the lesson can be the experience on which to base future investment decisions Where the need to have an expert to manage investments Where the wish to avoid this type of investment forever
We are already seeing memes stocks producing such actions. It is only a matter of time before emotionally charged IPO reversals become widespread and recognized.
Addendum – Easy access to IPO data via FinViz.com
For additional IPO data and, in particular, for stock charts showing similar patterns of investor behavior, do the following:
- Go to FinViz.com
- Click on “Screener”
- Choose the desired sector (or “All”)
- Choose the desired industry (or “All”) – If you choose “All” for the sector, select “Stocks only” here to exclude ETFs
- Choose a country
- Select the IPO period
- Select from the tabs, starting with “Preview”, to see various data. “Custom” allows you to create your own page.
Below are the charts, set to candlesticks and weekly intervals. Examining all IPOs this way reveals the many short-lived ups and downs.