The pullback in the stock market is a clear sign that investors are worried about Covid-19’s impact on the global economy. They are shunning risk by selling stocks and rushing into bonds and cash.
Or are they? Strange as it may seem, several of last year’s 159 initial public offering – highly volatile stocks like Slack (WORK), Beyond Meat (BYND) and Zoom (ZM) are up sharply this year.
Sure, these three companies all have been doing well despite the coronavirus outbreak. Their strength is also notable considering that demand for new initial public offerings is expected to slow dramatically.
Only 35 companies went public in the first quarter of 2020, according to FactSet. That’s down 15% from the same time a year ago and a 35% drop from the fourth quarter of 2019.
Slack and Zoom have benefited from more people working at home. And demand for Beyond Meat’s plant-based products could increase due to concerns about meat safety and the availability of beef, pork and chicken since workers at companies like food giant Tyson (TSN) have contracted Covid-19.
Beyond Meat actually posted a quarterly profit Tuesday as sales more than doubled.
And many other newcomers from 2019 are doing well too. Richard Branson’s Virgin Galactic (SPCE), Peloton (PTON) and Chewy (CHWY) have all soared this year. And the Renaissance IPO ETF (IPO), which includes many of the top new offerings of 2019, is flat this year while the S&P 500 has fallen 11%.
Still, investors are buying shares of some of the most speculative growth stocks at a time when the risks for the broader market are higher than they’ve been since 2008.
“I’d be worried about companies that came to the market last year. I’m not on the recent IPO bandwagon,” said Clark Kendall, CEO of Kendall Capital. “But it’s America. So people have the opportunity to make bad investment decisions.”
Danger in trying to hit home runs with IPOs
Kendall argues that many of the class of 2019 IPOs had poor fundamentals before the coronavirus outbreak and that conditions are only getting worse because of the coronavirus.
Slack, for example, continues to lose money. And even companies that are profitable are extremely pricey. Beyond Meat now trades at more than 700 times its 2020 earnings estimates.
So for every IPO success, there could be multiple flops. That’s why Kendall typically shuns newer offerings in favor of more stable blue chips.
“I want to hit singles and doubles instead of trying to swing for the fences in hopes of finding the next Zoom,” he said.
Many of last year’s IPOs might also be following the lead of larger, profitable tech stocks. The Nasdaq has fallen less than 1% this year, compared to the Dow’s drop of more than 16%.
That tech heavy index has rebounded sharply from its lows thanks to gains in the so-called FAANG stocks. Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google owner Alphabet (GOOGL) are now all in positive territory this year. So is Microsoft (MSFT) for that matter.
“In this environment, it’s notable to see the strength of the growth stalwarts,” said Dan Hanson, chief investment officer of Ivy Investments. “Yes, it’s a narrow market but look at the stocks that are leading the market and they are being powered by strong fundamentals.”
Cautionary tales from some top unicorns
Not all of last year’s new stocks are thriving, however.
Uber (UBER) and Lyft (LYFT) have both fallen this year as the Covid-19 pandemic has ground business to a halt. Both have announced layoffs. And the slump in demand could make it even more difficult for either ridesharing company to turn a profit anytime soon.
And then there’s Pinterest (PINS).
Shares of the photo sharing social media site were up 12% in 2020 before the company reported earnings after the close on Tuesday. But Pinterest also warned Tuesday that its profit margins will get hit as advertisers pull back. Pinterest’s stock plunged nearly 15% on the news.
That wiped out all of this year’s gains for the stock, showing just how fragile the market’s psyche is – particularly when it comes to young companies with little margin for error in these uncertain times.
