The Update Issue: A Bubble for IPOs, a Headache for Hertz, a Big Loss for LVMH, a Win for Five Below

As I've written before, 2021 has been a gangbusters year for the number of initial public offerings ('IPOs'), but less so for IPO stock performance... While investment banks count up their hefty profits on underwritings this year, investors in the Class of 2021 IPOs are often left with losses. When I last wrote about the […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: A Bubble for IPOs, a Headache for Hertz, a Big Loss for LVMH, a Win for Five Below By Berna Barshay As I've written before, 2021 has been a gangbusters year for the number of initial public offerings ('IPOs'), but less so for IPO stock performance... While investment banks count up their [hefty profits on underwritings this year]( investors in the Class of 2021 IPOs are often left with losses. When I last wrote about the overwhelming number of deals and their underwhelming performance, [it was July, and by my count, 42% of 2021 IPOs had already busted](. An IPO qualifies as busted when the stock trades below the IPO listing price. That 42% figure excluded special purpose acquisition company ("SPAC") IPOs – but including them wouldn't have made the bust ratio any better, as 2021 has been a tough one for SPACs as well. Fast forward to today, and according to a Financial Times article that came out over the weekend, half of all IPOs that raised more than $1 billion this year have busted. When I looked at this in the summer, I included all IPOs – not just the bigger ones – and only looking in the U.S. But I think it's directionally accurate to say that recent IPO performance has only gotten worse since the summer. We had a bit of a back and forth about this internally when the article hit, and my Empire Financial Research colleagues Enrique Abeyta and Herb Greenberg felt this was nothing out of the ordinary. I countered that the speed at which these deals are busting is notable... and the Financial Times agrees with me... Dealogic data show 49% of the 43 IPOs that raised $1 billion or more this year in London, Hong Kong, India, and New York are trading below their issuance prices. By comparison, among large IPOs that listed in 2019, about 33% were below issuance price a year after hitting the market, while 27% of those priced in 2020 were in the red after 12 months of trading. These deals are breaking faster than normal... and I think that's largely related to the inflated prices that they are listing at... Simply put, IPO prices have gotten a little bubble-y, especially when you consider the first-day trading pops – which is the real price that most retail investors get in on. I've lost track of how many times I've written this year in conjunction with a new IPO version of "this is an interesting company, but the valuation is too rich for my blood." --------------------------------------------------------------- Recommended Links: [Where Are Stocks Going Next?]( A new kind of company with almost no revenue, no product, and no employees could 10X your money – even if stocks keep falling. Beginning with a tiny $9 "driverless car" company, which could become one of the biggest winners you'll ever see. [Click here to learn more](. --------------------------------------------------------------- [Whitney Tilson: My No. 1 pick]( There's a huge new tech trend coming to your hometown – which could make you a small fortune over the next few years. And today we're revealing the name and stock ticker symbol of Whitney's favorite way to make money from this trend. [You get his top pick for free](. --------------------------------------------------------------- Investor excitement for new IPOs that promise high growth allowed bankers and the companies going public to get greedy... A strong stock market with soaring valuations was a great backdrop for pricing IPOs richly. While bankers do try to advise companies not to price their IPOs so high that they go down the first day, it also is in the company's interest to price deals as high as possible while still getting that first-day pop. A higher price means more proceeds to the company going public (or its private investors selling out on the deal)... and higher fees to the underwriting banks as well. I would break up what I see as an IPO bubble into two camps. First, there are the companies that have solid business models, with good growth prospects and demonstrated proof of a profitable business model. But these IPOs are just priced so high that the embedded expectations for future growth are extremely aggressive, perhaps in some cases insane. A good example of this kind of IPO would be automated legal services company LegalZoom.com (LZ) – it's probably a decent business, but it was just priced too high, so it busted. In the other camp are companies that I would characterize as not ready for prime time. They aren't profitable, don't have a clear path to profits, and their growth trajectory has signs of bumpiness. A prime example of this type of busted IPO is [Rent the Runway (RENT), which I wrote about extensively last month]( and it's down 30% since it went public. Yesterday was a particularly terrible day for speculative consumer IPOs like Rent the Runway... Wednesday was a brutal day in the markets overall, with the S&P 500 Index down 1.2% and the small-cap Russell 2000 Index down 2.3%. Investors were spooked by both U.S. Federal Reserve Chair Jerome Powell's testimony that tapering could come sooner than market participants hoped, as well as the news that the omicron variant has arrived in the U.S. The indices held up a lot better than many individual stocks, where the carnage was widespread. Stronger performance from trillion-dollar cap tech giants like Apple (AAPL) and Alphabet (GOOGL) masked how rough it was for the average company yesterday. But things were particularly bad for the Class of 2021 IPOs, including these consumer ones that live together on a corner of my stock monitor...  Source: Bloomberg The 2021 IPOs listed here include shoe company Allbirds (BIRD), coffee chain Dutch Bros (BROS), Soho House parent Membership Collective (MCG), oat milk maker Oatley (OTLY), and hot dog chain Portillo's (PTLO). Also on the list are [resale companies Poshmark (POSH) and ThreadUp (TDUP)]( and [scrub maker Figs (FIGS)]( [salad chain Sweetgreen (SG)]( and Rent the Runway – the last three of which I have written about before with skepticism. The consumer IPO route was set off by Allbirds, which reported disappointing earnings before the open yesterday. You could say its lackluster results in its first publicly reported quarter was the canary in the coal mine for what a bumpy ride it can be when you buy shares in a young consumer company with no history of making money. Among the list of 10 recent IPOs above, only four have broken already (Membership Collective, Oatley, Poshmark, Rent the Runway), but the other six have all lost 30% or more of their value from their highest trading price. I think underwriters will have a tough time pushing out new consumer IPOs with dodgy profit histories until some of these recent IPOs turn around. Are you curious about what was really driving yesterday's sell-off? I was, so I ran a little poll on Twitter (TWTR)...  Source: Twitter/@Hedge_FundGirl My vote was the consensus one – option B, the market primarily sold off because of Powell's commentary about tapering. Anyone invested in car rental company Hertz (HTZZ) should read this horror story... It's too long to recount here, but this letter posted by a law professor who was refused a car at a Brooklyn Hertz location after making a reservation is quite epic...  Source: Twitter/@Klonick To sum it up in a way that doesn't do the story justice: (You can read the full letter [here]( The lawyer suggests that Hertz intentionally overbooks so it can turn around and charge desperate travelers a greater price renting at an alternate location when it runs out of cars. Airlines, of course, overbook all the time, but when you get bumped, you get cash or a future travel credit as compensation. In Hertz's case, when it inconveniences you, it rewards you with the opportunity to pay three times as much on a rental somewhere else. Based on the responses to the original post, it sounds like what the law professor experienced is not an isolated incident. Something to keep an eye on if you own HTZZ shares (or rent from Hertz)... French luxury conglomerate LVMH (MC.PA) suffered a shocking loss on Sunday with the passing of designer Virgil Abloh... Abloh, who was only 41, died after secretly suffering from cancer for several years. He was the head designer for men's ready-to-wear at LVMH's Louis Vuitton and at the label he founded, Off-White. LVMH owns 60% of the Off-White trademark, having bought the stake this summer. At the time, some were surprised that Abloh had ceded majority control of the hot brand to LVMH. However, others interpreted it as a sign that Abloh was getting an even bigger seat at the table at LVMH, France's largest company by market cap. Of course, now, knowing that he was battling a terminal illness, many other motivations could be ascribed to the deal. Abloh's influence on the fashion world in recent years cannot be overstated. He was one of the first people to merge the worlds of high fashion and streetwear... and no one was more successful at this over the last decade. [Getting into the athleisure business has been a boom for luxury companies]( like LVMH and Versace parent Capri (CPRI), and Abloh was a big part of making that happen. Abloh was also a frequent collaborator with athletic giant Nike (NKE). He worked with other entities ranging from Swedish furniture retailer IKEA to visual artists and museums to musicians to nonprofits. He also was known to mentor many upcoming designers. It's a giant loss for the fashion world, LVMH, and of course, his family and friends. Briefly, we got a stellar earnings report from retailer Five Below (FIVE) last night... The "fun dollar store" clobbered earnings expectations, turning an 8% topline beat into a 48% earning beat. Shares had sold off in the early fall as investors worried that rising supply chain costs and general inflation for goods and labor would clip profits at the retailer. The company sells most of its items for $5 or less, theoretically limiting its ability to absorb cost pressures. In [the November 3 Empire Financial Daily]( Five Below was one of two retailers I called out as oversold on the worries about the supply chain. These upside results prove how strong execution continues to be at Five Below. Management not only handled the challenges – they crushed it in the quarter. And they did this in a quarter that saw many other retailers – including ones with the benefit of much higher selling prices – get tripped up. FIVE shares were up as much as 10% last night in after-hours trading but are only up around 3% today. After initially rising after the original essay, FIVE shares are now down 4% from when I originally wrote about the company. The drop is more about multiple contractions at high multiple companies than anything to do with Five Below... This is a company that is performing. I like FIVE shares even more now than I did on November 3. The stock is a touch lower, and a lot of the uncertainty around the supply chain has been removed. In the mailbag, more readers react to my bearish piece on salad chain Sweetgreen (SG)... SG shares are now down a stunning 30% in the 17 days since that piece. Has the recent pullback for the Class of 2021 IPOs made you warier of buying the next companies to go public? What do you think was the main driver of yesterday's sell-off? Have you ever had a crazy rental car experience like the one the law professor posted? I know I have! Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "My friend, a private equity expert on restaurants, points out that their 4-wall margin is 12%. This is a business plan with no chance of showing a profit. Very important to the thesis. Check it out." – David M. Berna comment: David, thank you for sharing. I love getting input from experts like this. I agree 12% is an unimpressive four-wall margin for a restaurant chain. I do think it had been higher historically before the pandemic, which took a bite out of store productivity. That said, I agree with your friend that profitability may be elusive here. "Thank you, After living 15 years overseas, I'm caregiving a few more months in U.S. governor-assassination-attempting Trump country. First, what I've observed of local eating habits is a preference for large portions and cheap prices – often regardless of nutritional value. Second and third, fatty, salty foods are often marketed here as an essential part of 'game night' or 'party time,' and meat consumption is linked to the masculinity of our patriarchal American society. Is it possible to replace an extra-large 'meat-lovers' pizza and a side of spicy buffalo wings with individually sized kale veggie Caesars? Fourth, the locals with kids will not pay for $15 salads that they can make or buy more affordably from a grocery store. Finally, people don't live in rural areas because they have high education and can afford to live in Manhattan or choose to... Food prices are constrained by local incomes. As irrational as food preferences may be, they are difficult to change permanently. "That said, we need to consider the population of urban high-earners who are working remotely and moving to nonurban places and bringing with them a preference for $15 salads and more. That's where there might be a growing market – but look specifically to where these people are moving." – Ricky M. Berna comment: Ricky, I agree that the size of Sweetgreen's addressable market outside of big cities and their suburbs remains a question mark. Like you, I am skeptical. Regards, Berna Barshay December 2, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](