How To Approach The Booming IPO Market (Plus 2 I’m Watching Closely)
It’s tough to get a read on the market these days. For every piece of positive news, there seems to be a bit of countervailing data that may be reason to give us pause.
Yet after stumbling out of the gate on Monday, the market is on pace to close out its fourth straight day of gains this week.
Investors were concerned about the “delta variant” leading to a rising number of Covid-19 cases on Monday, but those fears were soon overridden by a slew of positive earnings results.
Coca-Cola, Verizon, American Express, Johnson & Johnson, and Chipotle were among some of the big winners posting impressive results.
Meanwhile, jobless claims were released yesterday, showing the highest level in two months. Manufacturing PMI survey readings for July clocked in 59.7, down from 63.7 in June. (Although a reading above 50 indicates growth, this seems to be a sign of a possible cooldown).
And in the important but all too often ignored bond market, yields on the 10-year Treasury have plummeted from a peak of around 1.75% in late March to about 1.18% earlier this week, according to CNBC.
Since yields fall as investors buy bonds, it suggests that there may be concerns about the rapid recovery slowing down.
Despite these seemingly conflicting signs, the prevailing sentiment in the stock market seems to be bullish for now.
Consider the number of initial public offerings (IPOs) happening. There are so many it’s frankly getting tough to keep track of them. I counted six just yesterday, and according to Barron’s, we’ll have about 20 in total this week.
In just a second, I’m going to turn things over to my colleague Jimmy Butts, who recently wrote about the “boom” that’s happening in the IPO market. But first, I want to tell you about two recent IPOs in particular that I’m going to keep an eye on…
I’ve Got My Eye On These 2 IPOs
One IPO I’m keeping an eye on is Zevia (Nasdaq: ZVIA), a Los Angeles-based maker of sodas and energy drinks. The company’s products are sweetened with stevia, providing a natural plant-based alternative to sugary drinks.
Zevia began trading on public markets Thursday.
The company posted sales of $110 million in 2020, a year-over-year increase of 29%. It also boasts gross margins of 43-45% according to its pre-IPO prospectus. What’s more, 13% of sales come from e-commerce, likely reflecting an increasing interest from millennial buyers who avoided grocery stores during the pandemic.
While the company reported a $6 million loss in 2020, it says the first quarter of this year has been profitable.
You can start to see the investment case building here, if you think about it…
I’ve been an avid consumer of the company’s products for a couple of years now. We don’t buy any drinks with sugar in our house, yet every alternative we’ve tried (whether from Coca-Cola or elsewhere) hasn’t seemed to be able to get the magic formula right.
Zevia is onto something. And considering the fact that the nation’s largest demographic (millennials) is now entering its prime purchasing age, the big soda makers know that they need to adapt to changing taste trends, fast.
I’m not sure whether Zevia can turn into the next Monster Beverage (Nasdaq: MNST). In that case, MNST was an upstart maker of energy drinks that went on to dominate its market and become one of the greatest investments of the past 20 years. But what I do know is that sugar is “out”, and plant-based alternatives are “in”. Eventually, either Coca-Cola or PepsiCo could come knocking and scoop this one up for a rich premium. Stay tuned.
The other recent IPO I’m watching is F45 Training (Nasdaq: FXLV).
This is a chain of fitness studios that got their start in Australia and has grown to 1,555 studios and 2,801 franchises across 63 countries. The company is now headquartered in Austin, TX, and boasts Hollywood actor Mark Wahlberg as an early investor, franchise owner and current board member.
The company’s studios focus on providing intense functional fitness training classes that last 45 minutes. They can also be “scaled” to a person’s ability and fitness level. F45 also post workouts and classes online, which has helped with customer retention and growing the brand during the pandemic.
CEO Adam Gilchrist says more than 90% of its studios have reopened after being shut down, and that attendance is outpacing the rate before closures.
I’ve been seeing these studios pop up all over town. And I know the brand has garnered a community of hard-core fans. But, like with Zevia, I’m waiting to pull the trigger on this one. One reason is because, as Yahoo Finance points out, F45 is still unprofitable.
The company had a net loss of $37 million on revenue of $18 million for the first three months of 2021, compared with a loss of $733,000 on $25 million in revenue during the same period last year, according to filings.
My take: watch this one as the excitement around the IPO begins to cool down. Look for the company to get a few quarters under its belt. If it looks like the rapid growth of the brand is back on the right track and there is a path to profitability, then consider taking a small position.
A Big Year For IPOs — Here’s My Advice
It’s been a big year for IPOs so far. More than 200 IPOs having started trading this year, which is up significantly compared with last year, which is reasonable given the health pandemic.
But even comparing it to the first half of 2019 — where 80 companies went public — the numbers have skyrocketed.
So far, the class of 2021 IPOs has collectively raised $80 billion, also a massive improvement over the last two years.
Some big names have finally found their way into the public space this year, including the increasingly popular “buy now, pay later” company Affirm (Nasdaq: AFRM), television manufacturer Vizio Holdings (NYSE: VZIO), and consumer goods brand The Honest Company (Nasdaq: HNST), which was founded by actress Jessica Alba.
Another interesting company that began trading in May is Oatly Group (Nasdsaq: OTLY), which produces oat milk. Traditional milk alternatives have been making big waves over the last few years and formed the blueprint for my position in the alternative meat company Beyond Meat (Nasdaq: BYND).
Other popular companies that debuted this year are gaming company Roblox (Nasdaq: RBLX), Coinbase (Nasdaq: COIN), and Squarespace (NYSE: SQSP).
It doesn’t seem like there will be a slowdown in IPOs anytime soon…
There’s the highly anticipated debut of the popular trading app, Robinhood, which filed for initial public offering earlier this month, along with yogurt maker Chobani.
But while there will always be companies receiving all the media attention when they go public, I’ll be keeping my eye out for all the ones that quietly list.
It can be fun and exciting to jump on a popular company that’s debuting as a new publicly traded entity, but remember that oftentimes the bigger they’re pumped up the harder they fall post-IPO. So, be patient.
If you’re really excited about an upcoming IPO and everyone seems to be talking about it, give it a few months to see how it does. More often than not, shares will eventually take a hit as the nostalgia wears off and provides patient investors with a good entry point.
Remember, the market always provides us with new great opportunities. As Warren Buffett says, “You don’t have to swing at everything — you can wait for your pitch.”
Editor’s Note: As Jimmy mentioned, it pays to wait after a company goes public before putting your hard-earned money into it. But that doesn’t mean you can’t still hit a “home run” with your picks…
In fact, Jimmy and his team over at Top Stock Advisor have already hit big with several of the picks released in his “predictions” report earlier this year. And now, he’s releasing a “bonus” prediction that you won’t want to miss…