Behind the gruesome headlines of the last few days, this is still the best year in the IPO market since 2020. It’s about time.
Two years ago, Wall Street flinched when the Fed first threatened to take the free COVID money away and suddenly nobody wanted to buy dozens of promising early-stage stocks new to the market or stuck in the pipeline . . . too vulnerable to an economic slowdown and priced at levels that only made sense in a zero-rate world.
It took over a year before the underwriters finally remembered how to put a viable deal together. I started seeing the first signs back in June: a few tiny, obscure IPOs were actually finding a few buyers when they came out with growth stories so compelling that they made people forget all their fears and dream of a better future again.
And this was happening when the market as a whole was sliding into full-fledged bear territory! While the mood was terrible, we were finally starting to see some quality deals again. Not a lot, but enough to turn a few heads from the overall carnage.
I’d been waiting for exactly that signal to start selectively buying early-stage companies again . . . because I knew something other investors were too scared of an economic contraction on the horizon to ever learn.
As it turns out, companies that the underwriters are confident enough to push out in a slowdown outperform the market as a whole on average. It isn’t just a feel-good story. It’s just the way the Wall Street cycle works: every giant starts out as a baby stock investors don’t understand or recognize.
Over time, just enough of those babies grow into the giants of tomorrow. They win a devoted following. And the more money they make shareholders, the more devoted that following gets. But when times get tough, these hungry little companies know they either need to disrupt their bigger and more established rivals or die trying.
Here are the big bullet points:
* IPOs from the 1990-1 recession grew at a compound annual rate of 14.4% between then and now, beating the S&P 500’s 7.7% CAGR by practically two to one.
* Scared of a repeat of the dot-com crash? Companies brave enough to go public after the bubble popped in 2000 have beaten the broad market by about 8 percentage points a year!
* How about 2008, the “great” recession? Same. Those stocks have sextupled (+500%) since their debut. The S&P 500 gained a little more than 150% . . . not even a triple.
* Even in the wake of the brief but steep 2020 COVID recession, IPOs during the downturn are currently beating the broad market by 7 percentage points. There’s your IPO “Edge!”
In other words, it’s working. We just needed the right combination of quality deals and investor frustration with established stocks to bring this area of Wall Street back to life.
No recession lasts forever. Investors who can look beyond the week’s headlines want to make sure they don’t miss the boom ahead. After all, they’re already familiar with how the bust tastes. And it’s the youngest and smallest companies that can grow the fastest and run the farthest. I think that’s why the new crop of IPOs is getting such a bid.
Not every deal works. Some of the underwriters are still a little hungover from the Fed’s zero-rate party. But we’re seeing enough quality that the numbers look extremely good for 2023 and beyond . . . we’re hitting triple-digit scores again.
It’s been a cold couple of years. The economy might be getting colder. But investors who can look past the recession are already feeling the heat. And we’re just getting started!