The market for initial public offerings (IPOs) of stock in the U.S. has been been hotter than a firecracker in 2018. In the first half of the year, 120 companies have gone public in the U.S., raising $35.2 billion in the process, according to data from Dealogic cited by The Wall Street Journal. This is the largest volume of deals since 2014 and the fourth-busiest year-to-date period since 1995, per both sources. IPOs brought to market so far in 2018 have produced an average gain of 22% for investors, per the Journal.
Some of the big winners are Evolus Inc. (EOLS), Goosehead Insurance Inc. (GSHD), Solid Biosciences Inc. (SLDB), Zscaler Inc. (ZS), nLight Inc. (LASR) and Cactus Inc. (WHD), per a lengthy column in MarketWatch.
|Stock||Gain||What They Do|
|Cactus||76%||Oil & gas drilling equipment|
|Solid Biosciences||128%||Muscular dystrophy treatment|
|Zscaler||134%||Cloud computing security|
Source: Gains calculated through opening prices on July 3, per Yahoo Finance, based on IPO prices per Nasdaq.com.
More to Come
While 2018 is on pace to be one of the best years ever for IPOs in the U.S., some investment bankers and lawyers believe that 2019 may be an even bigger year, the Journal indicates. In the second half of 2018, the biggest offerings are likely to come from Chinese companies, but most of these are expected to list their shares in Hong Kong. One notable exception is Tencent Music Entertainment Group, the biggest music streaming company in China, which is likely to be one of the largest IPOs in the U.S. this year, per the Journal.
Not a Bubble
The fact that IPOs over the past year in the U.S. have been spread fairly widely across a variety of industries, and not just crowded in the technology sector, is an encouraging sign to some observers, Barron's reports. By contrast, during the dotcom bubble year of 1999, 78% of IPOs were of tech companies, according to data from Professor Jay Ritter of the University of Florida, as cited by Barron's. Ritter has been a leading researcher of the IPO market for more than 35 years. Ritter adds that 114 tech IPOs in 1999 doubled in price on their first day of trading, while none did in 2017 and only one so far in 2018.
Another positive development among tech IPOs, in contrast to previous eras such as 1999, is that these companies seem to be at a more mature stage of development. "There is an evolution across tech companies as they have greater scale and growth visibility," Michael Millman, the global head of technology banking at JPMorgan, told the Financial Times. Indeed, as both the FT and Barron's note, a number of tech companies that have reached unicorn status, with valuations of at least $1 billion, are still holding off on going public.
Nearly a 'Sure Thing'
There's no such thing as a "sure thing" in investing, but MarketWatch indicates that laser manufacturer nLight may be pretty close to one. The company is already profitable, and revenues are projected to increase by 25% from 2018 to 2019. The company should benefit, MarketWatch says, from two Trump administration initiatives, a defense buildup and a protectionist stance on trade. Its lasers are used in military applications, as well as in semiconductor manufacturing, and it competes against growing laser production in Asia.
Cloud computing and cybersecurity applications related to it are rapidly-growing markets. Zscaler is a cloud-based software as a service (SaaS) company dedicated to "securely connecting users to their applications, regardless of device, location, or network," per its website. MarketWatch says that "now is still a great time to get in on the ground floor" of this company that is projecting revenues to grow by 30% from 2018 to 2019, while possibly reaching breakeven within the next two years.
Big box discount retailer BJ's Wholesale Club Holdings Inc. (BJ) went public at $17 per share last week, per Reuters, and gained 39% to the open on July 2. Nonetheless, another MarketWatch story, identifies BJ's as a stock that investors should avoid. Among the reasons that they offer are:
- Private equity firms retain a 69% ownership stake, and thus can outvote public shareholders.
- The company became more indebted after being taken private in a 2011 leveraged buyout (LBO), and public shareholders are unlikely to receive cash dividends under the loan covenants.
- BJ's looks to be just average among supermarkets in terms of profitability and valuation metrics, such as return on invested capital (ROIC).