Date: July 2, 2021

IPO Market Says Investors Are Greedy – Don’t Follow The Herd

June, Q2 and the first half of 2021 are in the books. Boy, as slow as 2020 went, 2021 is racing along. And this is with the markets really cooperating. I wish everything would slow down.

I have so much to cover, but not enough time today so I am just going to offer some timely comments about the new offering market. FYI, I did a fun and educational interview on TD Ameritrade Network yesterday on this very topic along with my view as we enter July and Q2. Give it a watch HERE.

213 initial public offerings (IPOs) priced in the first half of 2021. That’s what a typical full year sees. This kind of supply only works when demand is really high. Demand is only really high when the credit markets are calm and investors are exuberant, giddy, happy or greedy. In other words, it’s the phase the most people make money in the markets.

It’s so interesting to see what kind of companies are going public. In this market we are seeing a near record number of those that lose money. Investors don’t care. They just want in. While the average IPO gain has exceeded 20%, all of that gain has come at the opening of trading. That means that only those investors who received shares at the offering price, usually institutional investors, saw those gains.

As you know one of my general rules in investing is not to buy IPOs the first day of trading or really, until at least 3-6 months have passed to let the dust settle. Far too may times, high profile, high demand IPOs often see irrational exuberance early on which leads to a quick run of huge gains followed by a collapse averaging 50%. Longtime readers have seen my IPO report before when one of those idiotically overprices issues gets priced.

I will leave you with a cherry picked example. Coinbase, the gargantuan cryptocurrency exchange, went public in April to some of the most hyped behavior of all-time. That’s a qualitative comment. You can see on the far left of the chart where it opened for trading, $380. It quickly ran to $440 on day one before falling back to $340.

One month later, the stock collapsed to $208. An awful lot of investors lost an awful lot of money getting caught up in the hysteria. They placate themselves with the typical ignorant comments like, “I don’t care. I amĀ  in it for the long-term”. Really, who is okay losing half of your investment so quickly?

IPOs are a great way to see what’s new and hot. I do not like them as investments, at least not right away. For every Google that never looks back, I have found so many that pop and drop. Have patience. It’s better to pay up a little than to walk into a buzz saw.

(For full disclosure we recently bought COIN)


Paul Schatz, President, Heritage Capital