Insight & action

Too Far, Too Fast for IPOs? Numbers Say No.

A number of recent IPOs have traded significantly above their offering prices. In the past week alone, five of the 12 new issues have risen at least 20 percent.

Aside from the 20 percent plunge of Candy Crush-maker King Digital Entertainment Plc (KING), IPOs have generally rallied well above their offering prices. The action has prompted Paul Hickey, founder of Bespoke Invest Group, to question whether animal spirits have gotten ahead of fundamentals.

So Paul compared the performance of recent IPOs to those which came of age during the tech bubble of 2000. As a proxy he chose the Bloomberg IPO Index, a capitalization-weighted index which measures the performance of stocks during their first publicly traded year. His conclusion: "The percentage change between the two periods is like night and day."

The index rallied over 400 percent from early 1999 to its peak in March of 2000, compared to a gain of 60 percent since the beginning of last year. Comparing apples to apples, the current market hardly appears like a bubble.

In fact, we would be inclined to buy into IPO performance via an exchange-traded fund called the Renaissance IPO fund (IPO). It invests assets into recent IPOs, re-balances quarterly and currently holds 59 companies.

As the chart makes clear, the IPO fund has finished every day this year higher than the S&P 500 Index on a year-to-date basis. Currently it's up two percent, slightly ahead of the broad market. We view owning the IPO fund as comparable to being long the market with a call option... a moderately leveraged bet.

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