Boom In IPOs
The Fed’s ongoing monetary easing policy, also known as monetary accommodation, is feeding the stock bull market and also increasing investors’ appetite for a boom in international public offerings (IPOs) in 2021.
There is a lot of money chasing a limited amount of good investment opportunities, which is increasing market volatility.
The boom in IPOs is not turning out to be a moveable feast for most retail investors
They are left often with the leftovers and empty plates. Venture capitalists, private investors are the ones sitting at the head of the feast table. This group of early investors realizes their profits in an IPO, which typically is when they exit their investment and pay themselves for the risks investing in the business. The earlier the investment made in a business, the higher the risk of potential business failure. But equally greater the reward should the business succeed.
If you decide to play the booming IPOs in 2021 you need to be mindful that in this current highly financialized system, buying stocks when the company goes public does not end up like flying into an air pocket
In other words, watch out that you are not buying into a bubble because the company’s stock value was so pumped up before the IPO.
For example, Charge Point Holdings (CHPT), the company providing the infrastructure for the electrification of mass transport, sounds like a winner riding the long waves of innovation.
CHP valuation At $36, the equity value for ChargePoint when the deal closed is well above its current market price of $21, six months later. IPO investors in CHP, including myself, have been left bag holding.
Sure, fundamentals are good, and given no stock-market crash CHP stock could be worth three times as much in 18 months, bearing in mind combustion vehicles are being phased out by governments around the world. CHP is experiencing exponential growth, has a first-mover advantage, and is a global leader in software electrification infrastructure.
There is a lesson to learn, stay away from the SPAC bubble and booming IPOs in 2021
Firstly, there are three distinct options for companies to go public, depending on market situations, associated costs, and shareholder preference.
- Initial Public Offering (IPO): A private company creates new shares which is underwritten by a financial organization and sold to the public.
- Special Purpose Acquisition Company (SPAC): A separate company with no operations is created strictly to raise capital to acquire the company going public. SPACs are the fastest method of going public and have become popular in recent years.
- Direct Listing: A private company enters a market with only existing, outstanding shares being traded and no new shares created. The cost is lower than that of an IPO since no fees need to be paid for underwriting.
SPAC were all the rage in 2020 but a growing number of SPAC retail investors got their fingers burnt
Take Bill Ackman’s Pershing Square, which is currently being sued by a band of lawyers including former U.S. Securities and Exchange Commissioner Robert Jackson filed lawsuits against two other blank-check companies in August
Pershing Square had been touted by Ackman to be an “investor-friendly” SPAC. Ackman even “tweeted a rap video about SPACs minting money” in February 2021. Ackman even joked about “marrying a unicorn” when talking about his SPAC’s launch last July.
But while Ackman had no trouble raising ample capital amongst investors who put their blind trust in the well-known Wall Street name to find IPO opportunities.
What happened was Ackman torching retail investors when Pershing Square Tontine Holdings failed to find a merger partner after months of bluster from Ackman. Now sources are telling Reuters that up to 50 lawsuits could wind up being filed.
Take Chicago psychiatrist who lost nearly $1 million “investing” in call options on the pre-merger entity, a new profile by Institutional Investor pointed out several days ago.
Moreover, 31-year-old German college student put about $294,000 in savings into the SPAC. He had lost about $100,000 on the investment. “I looked up to Ackman” he said, noting that he was impressed by Ackman’s SPAC doing away with free sponsor shares and encouraging holding shares post-merger through special warrants. “It was clear to me that this was a new kind of vehicle. To me, the warrants were the unique selling point of PSTH” he said.
Another investor lost $600,000 on PSTH options told II: “The gambler’s fallacy is always the high end. You think you’re invincible until you’re not, and that’s generally what happened to me”.
This is the risk of investing in markets with so much liquidity and few opportunities, investors are vulnerable to investor sharks and buying into frothy valuations.
But that also does not mean that you can’t find opportunities in booming IPOs in 2021
Notice that Charge Point Holdings is not the only stock that is currently trading below the first day of its IPO trading.
For example, CoinBase was listing at around 320 USD in April after the IPO listing, and today it is trading around 250 USD.
Perhaps the way to play the booming IPOs in 2021 is to avoid jumping in on the first week or month of an IPO
Be patient, wait a little while to let the hype and froth come out of the stock prices. Then buy on opportune dips if you believe the stock has good long-term growth potential.
As they say, it is all about timing your investment and if you buy high you are going to have to wait longer to realize a profit, that is assuming the business is successful.