From Fear to FOMO

It was just over six months ago that we penned a piece about the then market sell-off, cautioning against knee-jerk reactions to short-term headlines such as “Worst December Since 1937” amongst others. Well, it did not take long. At 4:01 ET on Friday, June 28, a headline flashed across the Bloomberg terminal: “S&P 500 Has Best First Half of Year Since 1997.” This time around, we again urge calm, in this case against the fear of missing out, or FOMO. We often write about why we choose to be strategic investors, and will not rehash it all here, but there are reasons why these quarterly letters are littered with examples of failed short-term market predictions and “hot dot” chasing. They often miss the mark. The latest “hot dot” is an oldy but a goody, Initial Public Offerings (IPOs).

We are often asked by clients if they should invest in a given IPO and the question has come up a bit more often with the recent spate of high-profile debuts. First, a quick disclaimer. We are not saying IPOs are inherently bad. A lot of the negative pieces written about IPOs center around the tech bubble and associated frenzy, and while there is some of that happening today, the brush frequently paints too broadly. Equity markets need new names to evolve and grow. Ultimately, a fraction of these companies become part of the fabric of the public equity markets and a select few even go on to become the mega cap blue chips we all know and love today. But, and this is an important but, it’s a small fraction and rarely does that happen in a straight line.

We typically have very little actionable insight to a particular company, but we would offer the following thought experiment: what do Amazon, Twitter, Facebook, Uber, Snap, Apple, Spotify, Tesla, Dropbox, and Etsy all have in common? They ALL traded below their IPO price at some point, and by an average of 36%! For roughly the last 25 years, a full 85% of IPOs greater than $500mm have at some point traded below their IPO price. This is not a tech-only factoid. Household names like Nike, Coca-Cola, and Lockheed Martin (and hundreds of others) went through a similar post-IPO dry spell. Yes, Beyond Meat’s meteoric rise from its May 1, 2019 IPO is impressive, and it may be that exceptional, but it has been an outlier. Looking deeper at the data helps us see a clearer picture. From 1980 through 2016, IPOs on average underperformed the market over their first three years. That does not mean they go on to underperform into perpetuity, but the initial fervor of the IPO has been, more often than not, unwarranted. Aforementioned Twitter is a good case-in-point. It went public in late 2013 at $26, and after some initial success, traded well below its IPO price until early 2018.