It's been a humbling time for the market for initial public offerings.
Offerings are only beginning to come to market after a very tough year in 2022. And September and October to date haven't offered much to give an investor hints of the values in newly-public companies.
Five highly-anticipated companies offered shares to the public. Only one, restaurant-chain Cava CAVA and marketing and data company Klaviyo are trading above their offering prices.
The others are ARM Holdings, the chip designer whose designs dominate mobile telephony; shopping service Instacart, and German sandal-and-footwear maker Birkenstock.
Related: Why you should pause before investing in Instacart amid 'IPO hype'
The offerings are widely dismissed as disappointing.
Cava is up 50.6% from its June pricing of $22, but is down 43% from its August intraday high of $58.10.
Instacart is down 14.8% from its $30 pricing on Sept. 18.
ARM is down less than 1% from its $51 pricing on Sept. 13. Klaviyo is up 5% from its pricing but 15.6% from its top.
Birkenstock's selloff was especially disappointing. The company dates from 1774. Its shares, trading on the New York Stock Exchange, ended the week down nearly 21% from its initial pricing of $46.
The IPO market overall has struggled since the end of 2001.
Renaissance Capital data shows that 30 companies went public in the third quarter, up from 23 in the second quarter. But there were 94 in the third quarter of 2021 and 83 in the third quarter of 2020.
Newly public stocks are volatile
Big jumps in companies going public often results when excitement explodes about a class of stocks, such as during the Dot-Com frenzy in the late 1990s. But the frenzy inevitably crashes.
What has stalled the IPO market this time starts with the the hangover from wild speculation in 2020 and 2021.
As important: The Federal Reserve's campaign to tame inflation pressures, set off when economies reopened from the worst of the Covid-19 pandemic. The central bank has pushed its key interest rates from near 0% in late 2021 to 5.25%-to-5.5%. It may do so again before the end of the year.
Rising rates do not help startups or stocks.
At the end of September, bond investors, spooked by huge financing demands from the federal government, pushed interest rates sharply higher. The widely watched 10-year Treasury yield nearly topped 5%, its highest level since 2007.
That makes the IPO market deeply vulnerable because into 2021, companies that could show massive revenue growth, regardless of profitability, could easily sell their shares and pay very low rates for money.
And that was a big problem, as Steffen Meisters of the global financial giant Partners Group told CNBC at a recent conference in Singapore. Four of five IPOs in the previous few years, he opined, were not profitable. The situation was so bad, he said, the IPO market had lost relevance.
In addition, global markets have been roiled in the last week by the Hamas attacks on Israel and Israel's violent retaliation. The conflict has seen 1,300 people killed in Israel and more than 2,200 in Gaza.
Patience is necessary
If offered a chance to buy into an IPO, should you?
Waiting is probably a better strategy to start so you can decide if, frankly, the company will prove to be real and offer real value. Real means the company is growing and, if it is not profitable, the path to sustained profitability should be very clear.
A note: Arm Holdings and Birkenstock are solid, profitable companies. ARM is in the Nasdaq Composite Index. Birkenstock is listed on the New York Stock Exchange.
Most IPOs, however, are small companies listed on the Nasdaq and get put into indexes favoring small stocks. Large companies like Microsoft and Nvidia are members of the Nasdaq-100 Index.
You can buy into exchange-traded funds that specialize in investing in IPOs. These include the Renaissance IPO, sponsored by Renaissance Capital and based on its proprietary IPO Index, and the First Trust US Equity Opportunities ETF. The latter is built around the IPOX-1000 Index, developed by Josef Schuster of IPOX Schuster Inc. of Chicago.
Both funds are built around smaller companies that have gone public and will hold the shares for several years at least. Both have had volatile results. The Renaissance ETF is up 25% this year but down 18.6% over the last three years. The First Trust ETF is up 4% this year but down 7.2% over the last three years.
Both Renaissance Capital and First Trust have separate ETF funds that invest in foreign IPOs.
