IPO - IPO Buzz Heats Up Ahead Of Arm And Instacart IPO ETF A Buy

2023-09-12 10:52:19 ET

Summary

• Arm Holdings and Instacart are set to go public, signaling a potential uptick in IPO activity.
• The IPO market has been lackluster in recent years, but there are signs of recovery.
• The Renaissance IPO ETF, which has underperformed in the past, could benefit from a recovering IPO market and a revamped ETF.
• This high-momentum fund may catch renewed investor interest and its technical chart is encouraging.

It was a long hot summer , but it’s been ice-cold in the IPO market. Few big names have gone public in recent months, though there was a slight uptick in activity toward the tail end of the first half. Are warm IPO winds about to blow as autumn gets underway? It appears that way. On Thursday, Arm Holdings ( ARM ) debuts on the New York Stock Exchange while Instacart ( CART ) goes public next week.

All this buzz has Wall Street bankers exclaiming, “We are so back!”

For the Renaissance IPO ETF ( IPO ), however, it has been a lousy two years. Recall the late 2020 through late 2021 period when free money was everywhere, and non-profitable tech firms were going public left and right. Once the bear market began and as the Fed hiked rates, however, capital markets froze up. The IPO ETF, which primarily holds 2021-era speculative tech names, grossly underperformed the broader market from early 2021 (meme stock mania and arguably the peak of speculative fervor) through year-end 2022. While 2023 has brought about a relative rebound in the highly volatile fund, it has yet to return to its former glory.

I am bullish, though. I have a buy rating on the IPO ETF based on what should be a recovering IPO market and a revamped ETF in due time. Also, I spotted a bullish technical feature on the fund’s chart.

IPO Absolute and Relative Returns Last 4 Years: Pop & Drop

Let’s go through some key charts to lay out IPO land. First, this one from Goldman Sachs illustrates that the macro environment appears to be on the mend. The median number of IPOs is in recovery mode after notching a low earlier this year. This more conducive backdrop is bullish for new (and profitable) companies hitting the tape.

Goldman Sachs: IPO Temperature Might Be Heating Up Soon

Next, there are simply bullish demographic factors at play. According to Bank of America Global Research, the number of listed US companies tends to track the 35-44 age group over time. With millennials coming into their peak earning years, more companies should receive enough demand to test the public market waters.

Demographics Are Destiny? IPO Activity Could Return.

There is also improved momentum with IPO this year. This factor performance view from Koyfin Charts proves that the best factor is indeed IPOs (which directly pulls from the IPO ETF). It is as if traders sniffed out an improving capital markets backdrop before the sell-side did, and well before ARM and CART captured the attention of investors this month.

Best Factor YTD? IPOs. Momentum Robust.

Looking closer at the IPO calendar, there’s activity brewing. Wall Street Horizon reports that a number of companies are going public just this week and next. This could be just the early innings of a Q4 ramp-up in dealmaking, M&A, and overall equity issuance.

Upcoming IPOs: ARM & CART The Highlights

Over the past four years, there have been more than 260 IPOs with starting valuations north of $1 billion. These firms have mainly been from the growth-heavy Information Technology, Consumer Discretionary, and parts of the Healthcare sectors. Collectively, the group is down 29% on average from their debut prices.

Lousy Recent IPOs

Largest US IPOs of 2023

Also from Wall Street Horizon , you can see just how lackluster the IPO space has been in recent quarters. We might not ever see the IPO boom times like early 2021 again (due to free money both from fiscal and monetary authorities), but simply returning to half the volume of the late 2020-early 2022 average would be a feat for bankers and emerging companies. I will also be curious to see if more small firms go public – not just established ones that are being bantered about on financial TV today.

IPO Market Freezes Up in 2022-2023

In terms of total equity issuance, it has been an utter crash.

Equity Issuance Plunged As the Era of Free Money Ends

But let’s dig into the IPO ETF. According to the issuer , the Renaissance IPO ETF is a transparent rules-based ETF designed to provide investors with exposure to a portfolio of the largest, most liquid, newly listed U.S. IPOs. Each quarter when the ETF is rebalanced, new IPOs are included, and older constituents are removed. At quarterly rebalances, constituents are weighted by float-adjusted market capitalization with a cap imposed on any weightings exceeding 10%.

Currently, the fund is highly weighted in the Information Technology sector – more than half the fund with a sizable chunk of those holdings being mid-cap in size. Moreover, the second-largest sector weight is the risk-on Consumer Discretionary space. Value areas make up a somewhat small portion of IPO. It is not surprising that the fund has outperformed many value ETFs and small-cap funds in 2023. If we see a revamp, to a more diverse set of equities, then I assert its risk profile could improve. Also, the inclusion of more profitable and stable businesses could help the fundamental and valuation cases.

IPO ETF: Heavy Growth Exposure

Top 10 Holdings: May 2020-2022 IPOs, Few Recent Go-Public Names

IPO sports a moderate annual expense ratio of 0.60% and has a somewhat modest $193 million in assets under management. With a 3-month average daily volume of just under 90,000 shares and a median 30-day bid/ask spread of 0.12%, liquidity is not always strong, so using limit orders during low-trading-volume periods of the day is prudent. IPO is a concentrated product with 53% of assets in the top 10 holdings.

There are 76 total positions with a moderate 57% annual turnover rate. Morningstar notes that the portfolio’s average price-to-earnings ratio is high at 34.6, though long-term earnings growth is 13.8%, making for a PEG of 2.5 - above the S&P 500’s 1.9. The fund does not currently have a trailing 12-month dividend yield , according to Seeking Alpha.

IPO: Portfolio & Factor Profiles

The Technical Take

So, here is where things get interesting on this moderately pricey portfolio. Notice in the chart below that IPO is putting in a bearish to bullish rounded bottom pattern. Since I first analyzed IPO , a clear resistance line has developed. The $36 to $38 range has met selling pressure on a couple of occasions. The most recent instance featured a 20% dip back down to $30 to $31 support, and where it's now rising long-term 200-day moving average came into play. With the 200dma positively sloped, the bulls appear to have regained some control of momentum.

Also take a look at the RSI momentum index at the top of the graph – it broke down from an uptrend last month but has since rebounded. We should eventually see a breakout above $38 on the third try to poke above the mid-high $30s. Technicians like to say there are no such things as triple tops, implying that a breakout takes place on attempt #3. It might take some time, but the uptick in IPO activity could be just the catalyst to bring new money into the space and hurdle IPO over that key line.

IPO: Bearish to Bullish Reversal, Rising 200DMA

The Bottom Line

I have a buy rating on IPO. It has strong momentum this year and a rebound in go-public activity could bring about renewed interest in this once-popular ETF. If we see more companies, perhaps from value areas, that would balance out the allocation.

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