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Recent IPOs Have Outrun the Market

21 March 2014 in Trading Ideas

With the broader market struggling to get back to its highs for the year, recent evidence shows that support for newer issues has been a little more equivocal.

Last month, the Wall Street Journal reported that despite stocks gaining little overall ground in 2014, the crop of IPOs from 2013 has more to show for itself.1

According to the Journal, shares of companies that went public in 2013 were up an average of 5.2% in 2014, as of Feb. 20. Although the performance is skewed by a particularly strong performance by a few dozen healthcare and technology startups, the 2.2% median year-to-date gain among last year’s IPOs still tops the S&P 500’s 0.5% decline over that period.

Skipping ahead three-and-a-half weeks later, there’s little reason to think much has changed. The S&P 500 is still only up by 2.6% in 2014. The Recent IPOs motif, for example, has gained 17.7% year-to-date.

 

Since the motif’s creation last November, it has increased 34.8%. The S&P 500 is up 4.5% in that same period.

The Journal noted that last year saw post-financial highs in the US in both the number of IPOs – and the amount of cash they raised. The fact that shares of these companies have outperformed, said the Journal, suggests investors haven’t bailed out of the names, although it also acknowledged that the volatility associated with IPOs can often lead to dramatic performance swings not for the faint of heart.

Some of the best performers of the 2013 class included early-stage healthcare firms like BioAmber and Kindred BioSciences.

Similarly, the Recent IPOs motif, which comprises IPO companies from the past 24 months, has been driven recently by the outperformance of its health care segment, which makes up 48% of the motif’s weighting.

Notable top-performing stocks in the motif include: Celladon (up 111.2% in the past month), Ultragenyx Pharmaceutical (up 37.7%), Auspex Pharmaceuticals (up 31.9%) and Trevana (up 30.5%).

The Journal pointed out that managers of large mutual funds, who have significant influence in pricing many IPOs, say they look at each debut on its own merits, regardless of how other deals have performed. On the other hand, at the very least, the average performance of IPOs can give a sense of whether deals are rewarding or punishing investors.

For now, it’s apparent that the optimism surrounding last year’s crush of IPO debuts isn’t yet on the wane but should be considered for those with a tolerance for accepting the increased risks.

1Matt Jarzemsky, “Last Year’s IPOs Outperforming Amid Stocks’ 2014 Slump,” WSJ.com, Feb. 21, 2014.

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