Money-Losing IPOs Are Tanking Fast!
With the S&P 500 index now up over 22% year to date and counting, it’s no surprise the market for initial public stock offerings (IPOs) is red-hot.
In fact, we’re on track for new records for money raised in IPOs.
But some of these records are of the wrong kind and it’s a warning flag for the market.
“Unprofitable companies are raising money in initial public offerings at the fastest pace since the dot-com bubble,” according to Bloomberg. And that tells me the IPO market is overheating.
The 2019 class of IPOs includes a record number of unicorns, IPOs with instant market caps of $1 billion-plus, including high-profile companies like Slack (NYSE: WORK), Beyond Meat (NASDAQ: BYND), Lyft Inc. (NASDAQ: LYFT) and Chewy (NYSE: CHWY).
The trouble is none of them makes any money.
Combined, these unprofitable IPOs have already raised the most cash of any year since at least 2000, when the dot-com bubble burst.
There is definitely a dark side to IPO investing once the market gets too frothy. Just ask misfortunate shareholders in plant-based burger phenom Beyond Meat, whose shares cratered roughly 23% over the past 10 days.
Slack Technologies Inc. is another example. Shares are now down nearly 46% from its IPO day opening price.
Plus, there’s a negative catalyst on the horizon that is likely to put recent IPOs under even more intense selling pressure: a wave of insider selling.
In fact, 30 IPOs will become eligible for selling between now and year-end, according to CNBC. That’s because the insider lockup periods are ending for this year’s IPO class.
What’s an insider stock lockup period, you ask?
Founders, employees and some early venture capital investors who buy in before a company goes public are usually restricted from selling their shares for 90–180 days after the IPO.
Now the lockup periods of the hottest IPOs are expiring. Beyond Meat’s lockup period just ended and shares slid. Chewy’s lockup period ends on Dec. 11. Slack’s expires Dec. 17.
This means a “flood of selling could weigh on already struggling IPOs,” according to CNBC.
IPOs were outperforming the stock market by a wide margin up until just a few months ago, but now they are falling fast.
Bottom line: You’ve got to be ultra-choosey with your stock selection process at this stage of the market cycle. High-quality dividend-paying stocks that offer you an immediate cash return, and less volatility, are the way to go right now.
Here’s to growing your wealth,