'Game on' for more IPOs but patience is key

Portfolio manager explains how he won with Lyft and why there is an appetite for risk in the market right now

'Game on' for more IPOs but patience is key

It’s game on for IPOs, according to a leading portfolio manager, with the market proving there is ample appetite for companies making public market debuts.

This year has seen headline-grabbing, billion-dollar IPOs from the likes of Uber, Lyft, Pinterest, Zoom Video Communications and Beyond Meat. According to data, more than $25 billion has been raised so far from these offerings, with many of them going on to demonstrate strong performance in the market.

Beyond Meat has been the star, with the stock trading around the $155 mark, which is more than six times its IPO price of $25, giving it a market capitalization of more than $9 billion. Zoom has doubled in value, trading around the mid-to-high 80s, Uber has hovered around its original offering of $45, while Lyft fell off after a promising start but has stabilised in the low $60s after opening at $72.

While notoriously unpredictable, these are encouraging signs that investors are thirsty for young companies with perceived room for growth. And with several big-name firms like Airbnb and Palantir reportedly eyeing IPOs in 2020, it’s a trend that looks set to continue.

Wolfgang Klein, senior investment advisor at Canaccord Genuity Wealth Management, told WP that companies don’t go public in financial crises and that the door is open for more to follow the likes of Lyft and Beyond Meat.

He said: “There is an appetite for risk right now that is very bullish for the market. Some are saying it’s very reminiscent of 1999 but the valuations are completely not in line with 1999. In other words, there is better value; there’s E under the P and, if not, there is revenue to talk about and revenue growth as opposed to just a concept, which was what the tech bubble was all about.

“How long the enthusiasm lasts for? I don’t know. Money is easy and available and that is bullish for the market. There is appetite for it. Companies like this don’t go public in financial crises, the IPO door is shut. [But now] it’s open, appetite is there, game on!”

For a discretionary manager like Klein, there are considerations. Buying an IPO for a client by going down the discretionary route means he forgoes the commission unless he does it on a transaction basis. The big IPOs recent are also American, meaning Canadians often can’t participate.

Regardless, hew said investors must be mindful of the reason a company goes to the public market – because they think they can get a good deal. Klein said it’s a classic strong hand to weak hands scenario, typical of a company looking to monetize its share value, which has often reached an unprecedented high.

Klein said: “It doesn’t mean it’s a bad business, it means the insiders are selling you stock, so be aware of that.

"Lyft came to public at $72 and in the first day of trading went to $78 and then rolled over and it rolled and it rolled and it rolled. Two days before Uber came to market, I said, ‘here’s our chance’ and we stepped in and bought Lyft at $53 and now it’s $60-61. To the savvy and astute, which we were at that time, although I also make a lot of mistakes and I’m quite dumb, we were smart because we waited for the fat pitch. It came and we took the pitch - it was a great trade.

“You could have done that with Google, I believe, and you certainly could have done that with Tim Horton’s. The morale of the story is, with IPOs you can often buy it cheaper than the IPO price if you are patient. Not always but often.

“You could have done the same with Facebook, too. There are some great examples of buying great companies at below IPO prices.”

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