Income Investors Can Profit from IPOs In Unconventional Ways Amid COVID-19 Crisis

Income investors can profit from IPOs in unconventional ways amid the COVID-19 crisis by taking indirect paths to tap into the record $167.65 billion raise in 457 deals during 2020.

The record dollar value of those initial public offerings (IPOs), fueled by Special Purpose Acquisition Companies (SPACs) that raise money without a specified purpose, topped the amount of all other years since 1995, when the data first started to be tracked by Dealogic, a provider of financial content and analytics. Compared to all other years going back to 1995, when Dealogic began tracking the information, 2020 ranked fifth in number, behind deals totaling 848 in historically high 1996, 621 in 1997, 586 in 1995 and 547 in 1999.

The IPO flow gushed in 2020 for the same reason other investments did well, as near-0% interest rates led investors to seek returns in new ways, said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

“The flood of liquidity provided by central banks and fiscal stimulus gave investors the cash to seek out those new sources of returns,” said Carlson, who also leads the Retirement Watch investment newsletter.

Income Investors Can Profit from IPOs In Unconventional Ways as They Set a Record Value in 2020 Led by SPACs

SPACs propelled the Finance sector to amass more than half of the total value of IPOs in 2020 by raising $85.07 billion in 252 deals, according to Dealogic. Heightened interest in health care during the ongoing COVID-19 crisis helped that sector finish second with 103 total IPOs that amassed $24.85 billion. The Computers & Electronics sector scooped up the third-largest number of IPOs in 2020 with 65 such deals but raised $38.67 billion, or 55.62% more than the Health Care sector, despite producing just 60.19% of the number of IPOs.

Health care gained heightened appeal from investors due to the global pandemic as people sought to capitalize on that trend, Carlson said. The IPO process in general likely shifted to virtual roadshows that can be done via video calls during a few days, rather than requiring extra time by traveling from city to city seeking investors to fund each IPO. The more efficient process helped to streamline the process of taking SPACs public in 2020, he added.

“Another factor is that many IPOs made a smaller number of shares available than would have been the case a few years ago,” Carlson said. “The scarcity increases the price and pushes demand for IPOs higher.”

Income Investors Can Profit from IPOs In Unconventional Ways, Kramer Counsels

“Income-oriented investors almost never think about buying the latest Wall Street debuts for a very simple reason: these companies tend to be younger and less interested in distributing current cash flow to shareholders,” said Hilary Kramer, host of a national radio program, “Millionaire Maker,” and head of the IPO Edge, GameChangers and Value Authority advisory services. “It took Microsoft 18 years to start paying dividends . . . can you wait that long? Here’s what I do for income in my IPO Edge portfolio — rocketing out the gate again, already up about 8% year to date (YTD): bypass the whole IPO process and invest in stocks that capture early-stage companies’ cash flow. The stocks themselves have sometimes been on the market for years or even decades. The companies they invest in, on the other hand, are as fresh as it gets and you get near-direct access to the ground-level business environment.”

Income Investors Can Profit from IPOs In Unconventional Ways and Should Keep Momentum in 2021

“The market for IPOs really surged toward the end of 2020, and I expect that momentum to carry forward into 2021,” Carlson said. “Technology and health care are likely to remain popular themes with investors. There’s a pipeline of companies getting ready to go public, and that’s fueling more interest in IPOs.”

Carlson urged individual investors to be “careful” in buying shares issued by companies that recently have gone public.

“In IPO surges, low-quality companies find it easier to go public at generous prices,” Carlson counseled. “Take a good look at a company’s fundamentals before trying to participate in an IPO. These periods of IPO popularity usually end when investors are burned after one or two low-quality IPOs fizzle shortly after going public.”

Pension fund chairman Bob Carlson answers questions from Paul Dykewicz before COVID-19.

Income Investors Can Profit from IPOs In Unconventional Ways Rather Than Buy Shares in 2020’s Three Largest Deals

The three largest IPOs in 2020 were New York-based financial company Pershing Square Tontine Holding Ltd. (NYSE:PSTH), raising $4 billion on July 22, 2020; technology company Snowflake Inc. (NYSE:SNOW), of San Mateo, California, gaining $3.86 billion; and San Francisco’s Airbnb Inc. (NASDAQ:ABNB), collecting $3.83 billion with its Dec. 9 offering. Close behind were DoorDash Inc. (NYSE:DASH), of San Francisco, producing $3.37 billion; China’s Lufax Holding Ltd. (NYSE:LU), attracting $2.69 billion; and New York-based health care company Royalty Pharma plc (NASDAQ:RPRX), capturing $2.50 billion.

Income Investors Can Profit from IPOs In Unconventional Ways, Avoiding Risks Such as the Hit SPACs Took in October 2020

A bump in the road for SPACs in the United States occurred in October when the price of the IPOs slid compared to earlier in the year, according to Dealogic’s data. For the first nine months of 2020, U.S. SPAC IPO prices had notched an average jump of 18.7% in the first month after an offering, compared to the initial price. But in October 2020, U.S. SPAC IPOs incurred a negative monthly change for the first time during the year with an average fall of 6.2% compared to the issuing price.

Additional headwinds for SPAC IPOs came in the aftermarket performance, as newly issued SPACs last October generally failed to climb much on the first day, with that month showing the lowest one-day return of just 0.34%, compared to other months in 2020. Despite the weakness, U.S. SPACs became the IPO story of the year.

Highlights include 50 SPAC IPOs priced in October to mark the largest number of deals produced in a single month. They accounted for 60% of U.S. IPOs for that month alone.

A total of 40 bookrunners participated in U.S. SPAC IPOs in 2020, the most ever in a single year. The current average time between initial filing and pricing of the IPO for 2020 US SPACs settled at 26 days in late 2020, compared to an average 31 days for the past five years.

Income Investors Can Profit from IPOs In Unconventional Ways as Third Wave of U.S. SPAC Offerings Advances

This current trend is part of the third wave of U.S. SPAC IPOs which began in 2017. The first wave started in the 1990s when the Securities and Exchange Commission (SEC) first introduced the SPAC rule. The second wave began around 2003 when some large banks started to participate in this market segment.

“This was clearly where the sizzle was last year, and the dynamics reflect one of my favorite market phenomena: animal spirits,” Kramer said. “When good things start happening on Wall Street, it’s contagious. The excitement spreads. Profit compounds. And when the supply of good news is constrained elsewhere in the world, the hot spots can reach temperatures that defy normal limits.”

“Last year was extremely disruptive for the global economy. Companies that dominated their markets in 2019 took a big step sideways. These aren’t nimble organizations. They’re big and unwieldy in a crisis. Disruption is rarely their friend unless they’re exploiting their scale to disrupt someone else’s business. And when disruption comes from outside the system as it did in the pandemic, the playing field flattens fast.”

Money Manager Advises That Income Investors Can Profit from IPOs In Unconventional Ways

The winners in that kind of red-hot environment were already working off a fierce competitive business plan to move fast and take no prisoners, Kramer said. And the smaller and younger you are, the less you have to lose, she added.

“You don’t play defensive,” Kramer added. “You can go for broke. That’s the kind of company that rewards investors who can grab it in the IPO or even before. They’ve rewarded my subscribers with triple-digit-percentage wins: new household names like Chewy Inc. (NASDAQ:CHWY), unicorns like Palantir Technologies Inc. (NASDAQ:PLTR) and Sprout Social Inc. (NASDAQ:SPT).”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

“Another thing that’s great about these companies is that they have room to double and redouble without straining market credibility much,” Kramer said. “Compared to Big Tech, these are still relatively small stocks. Take SPT, a next-generation response to social media networks like Facebook Inc. (NASDAQ:FB). It is up 140% for my subscribers in its first year, but that move only added $1.5 billion to its market capitalization. Just to reach Twitter Inc. (NASDAQ:TWTR) proportions we’d need to see 1,500% more upside from here. Meanwhile, FB needs to find another $750 billion just to double one more time. How likely is that, on any given day?”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

“Anyway, what happened last year in the IPO market boils down to investors realizing that in a disrupted world dinosaurs would suffer while more nimble competitors would get an opening to thrive,” Kramer continued. “Delivery and work-from-home companies started the boom. The vaccine gold rush got the fire going under every biotech stock with an angle on fighting viral infections, no matter how theoretical that connection was. And when CEOs and investment banks felt that heat, they rushed to get their companies onto the market. Deal volume soared. Every successful exit fed the fire.”

Income Investors Can Profit from IPOs In Unconventional Ways as Window of Opportunity Stays Open

Where are we now? The exit is still wide open and great companies are still taking advantage of it while they can, Kramer opined.

“We’ve done well in Airbnb Inc. (NASDAQ:ABNB) so far and of course PLTR,” Kramer said. “As long as the Fed keeps printing money, there’s plenty of cash to absorb additional supply. Biotech may be getting a little tired, but finance and new takes on technology keep bringing plenty of innovation to the table.”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

Mark Skousen, who heads the Forecasts & Strategies investment newsletter, said the IPO flow in 2020 appeared to be aided by the “flowering of new technology.”

He recalled Forbes magazine once publishing an article that reported two years after IPOs are completed, the majority of them sell for less than their initial offering price.

“Investing in IPOs is definitely high risk — it’s the story of the burning match,” Skousen said.

Mark Skousen, a descendant of Benjamin Franklin, meets with Paul Dykewicz in Philadelphia.

COVID-19 did not seem to hurt the IPO market in the least during 2020. The record value of IPOs in 2020 came despite of 21,045,468 cases and 357,166 deaths in the United States, along with 86,383,986 cases and 1,867,676 deaths worldwide, as of Jan. 8, according to Johns Hopkins University. The United States unfortunately has the dubious distinction of suffering the most cases and deaths of any country.

The IPO market reached new records for dollar value in 2020, and the flow is showing no signs of ending soon. The Jan. 5 special election results that gave Democrats the two U.S. Senate seats in Georgia that they needed to end Republican control of the upper chamber of Congress, so investors will need to watch for any new policy changes that may occur when the Biden administration begins on Jan 20 that could disrupt the the IPO bandwagon.