If you are an active investor you have experienced the volatility in the markets over the past few months. In general, market effects are magnified in the IPO market for a number of reasons including smaller market capitalizations and less investor awareness of newly public companies.
Our service is not aimed at "macro" elements and we've been busy for over 10 years in an IPO market that has been called "dead" and "hot" multiple times over those years. That said there are several points that are very salient to our analysis and valuation methods of IPO stocks as we go into 2019.
It's clear that the market dynamics have changed since late October. The popular "buy the dips" mentality has not served investors well since then and generally, investors have been "selling into strength" instead. Some call it "risk off" but by whatever name it's a tougher period to make money consistently in the markets. It's also harder to do an IPO when the market is moving 5% or more during your marketing period!
We will be launching an official IPO Candy Model Portfolio in January so we are preparing our "shopping list" for next month. We are being cautious going into it for a few reasons. Here is a summary:
- Business has been good in Q3 and so far in Q4 but there is evidence that pending tariff deadlines and tax incentives may have "pulled forward" some demand from future periods.
- Some sectors we are most keen on, like Enterprise SaaS, have been trading at high valuations and we'd like to see the Q4 print and hear 2019 guidance before taking full positions.
- Because 2018 was a strong year for the IPO market many lockups have or will soon come off. Some investors may be waiting to sell until January to defer taxes.
- Interest rates moved up quite a bit. They are still low but a 3% increase translates directly into lower prices using our "Present Future Value" models.
We've had a great run in the IPO market for a while. A pull-back is welcomed and needs some time to consolidate. We will be benchmarking our own portfolio against the IPO market and will be aiming for better returns!