September, not October as conventional wisdom wrongly believes, is the worst month of the year for the stock market. This September is no different. However, in 2019 it was growth that felt the greatest damage. The proximate cause, in my opinion is the IPO market.
In the glory days of IPO markets, new companies would be brought to market as entrepreneurs sought the capital markets for business expansion and capital injections. Typically, newly minted public companies would issue stock at reasonable valuations enabling the public to benefit from newly issued stock coming to market. Sometimes those IPOs were priced too cheap and sometimes they were priced too rich. However, on balance, there was enough room for the companies to grow while public investors could make some money. It also allowed maturation of the company’s stock price for a future secondary offering or insider sales.
That all changed with the private equity (PE) boom which took place in the wake of the tech bust in the early 2000s. New companies would receive funding from PE investors. Many of these PE firms were interlocked such as the Japanese Keiretsu or Korean Chaebol. In the US, interlocking directorates are prohibited under US antitrust laws. However, PE firms manage to get around those regulations. These PE firms tend to exist in Silicon Valley and act as modern day technology mobsters, without guns.
What PE firms do is invest or lend money to fledgling companies called “unicorns,” These unicorns go hat in hand repeatedly to the PE firms for round after round of financing. The PE firms have deep pockets of not only mega rich investors but also sovereign wealth funds. Each round creates another yet higher paper valuation of the unicorns. They have huge marketing machines which create all sorts of buzz and anticipation of an IPO. Eventually the PE firms, in need of getting a real valuation and restocking their coffers will launch an IPO.
The problem is that the companies are brought to market at extreme valuations. Many of the companies have never and will never make a dime. The stocks though greatly anticipated are launched with a bang and in the fullness of time turn into a dud.
Just this year the following IPOs hit the market:
– Uber (UBER) – priced at $45, rose to $47.08, now at $31.68. Market capitalization now $36.2 billion
– Lyft (LYFT) – priced at $72, rose to $88.60, now at $41.78. Market capitalization now $12.2 billion
– CrowdStrike (CRWD) – priced at $34, rose to $101.88, now at $62.02. Market capitalization now $2.9 billion
– Fiverr (FVRR) – priced at $21, rose to $30.33, now at $18.15. Market capitalization now $0.2 billion
– Slack (WORK) – priced at $26, rose to $38.44, now at $22.73. Market capitalization now $8.4 billion
– Beyond Meat (BYND) – priced at $25, rose to $239.71, now at $138.32. Market capitalization now $5.4 billion
– Pinterest (PINS) – priced at $19, rose to $36.83, now at $27,11. Market capitalization now $3.5 billion
Clearly, we have a mixed bag of IPOs, but on a capital weighted basis, these unicorn IPOs have been dismal failures. Of course, the PE firms made out like bandits, having dumped the companies onto a gullible public.
Now word comes that WeWork’s IPO is likely to be shelved. Airbnb is slated to come public. I would not buy that with counterfeit money.
Unfortunately, the market’s inability to sustain these IPOs has adversely impacted the prices of more established growth companies. Hence, the move out of growth into value this past month. This phenomenon has led me to sell off positions in growth names such as Roku (ROKU) and Trade Desk (TTD).
I have been busy behind the scenes focusing on automation and technology projects for LakeView Asset Management. Concurrently, August and September have been two of the best months for raising capital since I began the company in 2002; keeping me busy as well. One of these projects I have already rolled out, automating documentation via DocuSign (DOCU). In the fourth quarter I will roll out new client reporting technology, after spending the past few weeks researching and interviewing many vendors.
I have been asked by people whether the talk of impeachment matters to the markets. The simple answer is no, Earnings, interest rates and taxes are what’s important. Remember that markets fell during and after the Nixon impeachment investigations. The reason was simple; the US was mired in an oil crisis and recession. As for the Clinton impeachment, stocks soared for the opposite reason; the economy was strong and we were in a tech boom (which eventually busted). Right now, interest rates are low and going lower, corporate earnings remain strong and taxes remain low. What could change all that – a socialist replacing President Trump. If that happens, as I have told the same people who asked about impeachment, I will sell everything that is not nailed down and even go short.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BYND & DOCU – although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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