IPO Busts, Europe Struggles, and Trump Tumult Scare Markets!
Of mankind we may say in general they are fickle, hypocritical, and greedy of gain. Niccolo Machiavelli
In the college sports world, there is a famous quote regarding coaching, “It’s not the X’s and the O’s, it’s the Jimmies and the Joe’s.” You see, when it comes to the dominant sports of football and basketball, the teams with the best players usually win. Yes, occasionally, there are instances where a unique coach makes a big difference in the outcomes. As people famously said about legendary Alabama football leader Bear Bryant, ‘He could take a his’n and beat a your’n, and take a your’n, and beat a his’n.’ Most of the time, the better the players, the better the result. The quest for these athletes involves convincing them that your school is the right place for them. Nowadays, that involves big shoe companies (Nike, Adidas, Under Armour) and contracts with athletic departments for millions of dollars. However, the act of trying to sell teenage athletes on the relative merits of your higher academic institution is a challenge. Remember, you are dealing with young people who often are undecided about almost everything, other than they want to enjoy life. With this idea in mind, the financial markets can also be seen in a similar fashion. Let’s take a look at recent events, particularly the IPO market.
Over the last year, and specifically the past few weeks, several high profile companies have taken their companies public or initiated the process to do so. Historically, IPO’s have a poor track record of providing superior returns. In fact, for every Google or Amazon that generates massive returns, there are a far greater number which under perform market indexes by a wide margin. Investors in public markets come from a wide variety of sources, including large pension funds, private equity groups, other public companies, hedge funds, mutual funds, investment banks, wealth management firms, and the little guys, retail investors. Almost all are quite sophisticated and have a great deal of experience in evaluating enterprises with a wide variety of business models and sizes. If there are weaknesses or serious questions regarding important issues like corporate governance, leadership, or business model strength during the underwriting process, the bankers and lawyers are going to bring them up. Uber and Lyft had high hopes for big successes, as did a technology firm called Slack. Pinterest also came to market with millions of customers. The latest entities to enter the arena were real estate slash lifestyle brand WeWork, and exercise and fitness platform Pelaton. So what transpired?
Let’s start with the outlier, a firm very few had heard of, Beyond Meat. It went public at a price in the twenties, and now sits at 151 and change, a clear moonshot. Big win. How about Uber and Lyft? Uber came public in May, priced at 42 smackers. It sits at a shade over 30 today. Lyft, which entered the arena before Uber, opened at the end of March at a smidgen over 87, and now can be had for 41.35. Ouch. Slack is a high tech firm many are impressed with as well. It came out of the gate at the end of June, priced at 38 ish. Many believe it is a bargain at a touch over 22 smackers. WeWork, with a founder who aspired to reach the first trillion dollar value, had plans of a fifty billion dollar starting price. Alas, corporate governance, business model, and profitability issues chopped that one down by over 90%. The founder has been replaced as CEO, and the largest investor, Softbank, pulled the IPO. Pelaton went through with theirs, which opened at $29, and sits at a shade below 26. As you see, IPO’s are far from a sure thing. Underwriters make sure their best customers get the largest allotment of stock, and they also usually take a piece of the offering, too. Like any area of investing, the tides of the market can change quickly, and the direction might not be what anyone thought. Discretion and caution is advised, imagine that.
Overseas, weakness in Germany, because of continued problems in the export area, continues to plague Europe. The never ending Brexit question also is a drag on global sentiment. We have to mention the out and out nuclear war in our political system, that being the Trump adminstration and it’s battle royal with the Democratic party. It looks like we better get used to that joy for at least the next year. On the earnings front, KB Homes laid a nice foundation with a good number, and auto titans Carmax and Autozone reported contrasting results. Long a stellar performer, Factset Research beat it’s estimates. Here in Las Vegas, the gaming industry is full of action. With Eldorado Resorts taking control at Caesars, there are plenty of rumors abound as to what casinos will be sold to help pay down the high debt level. It appears MGM Resorts will sell two of its crown jewels to Blackstone, the Bellagio and MGM. Additionally, CEO Jim Murren will also let go of cash machine Circus Circus, to Treasure Island owner Phil Ruffin. Golden Nugget and Houston Rockets head honcho, Tillman Fertitta, reportedly will buy the Del Frisco’s Steakhouse chain, to add to his collection in that area (Morton’s, among others). Many of these properties have been with their owners for decades. As evidenced by what is transpiring in the IPO market and here in Las Vegas, where the house is the typically the winner, Machiavelli continues to have human nature nailed.
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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.