2023-05-01 00:01:48 ET
Summary
- Kenvue, the consumer health product spinoff from Johnson & Johnson, was going to be the biggest in a year.
- ARM just filed confidentially for an IPO in NY will be an even bigger deal.
- Instacart will be sure to follow.
- There was a dearth of IPOs for more than a year. The start of big IPOs is quite an endorsement of the health of this rally.
When the market is at its best, it performs the function it was truly created for – Buying and Selling Companies.
Individual investors and even big money managers are playing a secondary role. Traders and investors provide liquidity and price discovery. Liquidity is important in case an already public company wishes to make a quick secondary offering they know that there will always be a buying at the right price. There were hedge fund buyers of BBBY of secondary securities nearly to the last day. So liquidity is important as it provides demand, sometimes it’s a bad bargain even for accredited investors. I am always citing M&A activity on the market because it means that stocks are cheap if a strategic buyer is willing to pay up for a stock. An IPO raises the notion that the stock market is healthy and stable enough to support these blockbuster IPOs. Meaning that this rally has legs, an investment bank that runs the book is putting its reputation on the line if the day of the IPO the market crashes. So in effect, bulge-bracket members of the financial community are putting more than money on the line, by essentially saying our stock market will still be rallying, or if not then stable with plenty of buyers to make the IPO successful.
I believe that Kenvue is a $40 Billion valuation, and ARM will be looking for a $50 Billion
I expect Instacart to announce soon since they already filed to go public before. DoorDash ( DASH ) has a market cap of $24B so Instacart should be somewhere in that ballpark I presume. As soon as Kenvue and ARM break out it will open the floodgates to other less-quality IPOs. I bet a ton of them with be based on Chat GPT-like functionality. That’s how it happens. In the beginning, you get the “cream of the crop”, the companies with the best business model, quality earnings, and growing revenue. After about a dozen decent stocks come the kind you have to think 3 times before you take a chance. The point of this topic is not to analyze the coming stream of IPOs though it will be fascinating to watch. My main point is that if IPO candidates are coming to the market with more than $90B market cap already, then this rally has plenty more “oomf” in potential going forward.
IPOs will bring more participants back into stocks so it is more than just an endorsement.
It’s clear to me that ARM Holdings will draw a lot of attention and investors because of its huge role in the Chip ecosystem. Nearly every new CPU and specialty processor uses ARM designs. QUALCOMM ( QCOM ) Snapdragon chips in many android phones are based on ARM, and Apple's ( AAPL ) M series of chips is yet another example of a leading chip based on ARM licensing. Any savvy tech investor would want a piece of that action, including me. Johnson & Johnson consumer products like Johnson’s baby shampoo, Tylenol, Listerine, Neutrogena, and Nicorette should attract market participants that want a dividend-bearing and growing consumer product company with global brand recognition. I would like that in my long-term investment account myself. As far as Instacart and the dozen or so other quality names that will likely be coming across the transom the fact that will be lining up to sell shares in their companies will bring more buyers. The news of their success and the profits buying at the open produced will add to the interest and excitement in our stock markets. Of course, once again the greater number of willing participants for acquiring new equity in turn brings lower quality IPOs. This continues until the market has absorbed all that it can. This might be part of the last act of this bear market rally. It remains to be seen if my prior projection will be correct, and the vertiginous phase of this rally ends with a blow of the top. If so, it will tumble like a house of cards with one too many layers piled up. Until then let’s make the most of it. The key will be knowing when to pull the rip cord.
Relying on going to cash at the exact perfect time is just not feasible. So what then?
If you go completely to cash, when will you ever get in? In my experience, it is better to slowly reduce positions as the market evolves. I keep a very close eye on the price action of various “leadership” stocks in different sectors along with a number of evolving market indicators. I start with individual stocks short (via Puts only) If you read my last piece I already broached the topic of selecting individual short candidates. The Group Mind Investing Community went long Puts on FRC just on Thursday and closed out our positions toward Friday’s close. Why so late? Well, one of our members made 80%, and I got away with 47% so it worked just fine. Again why so late? Well, FRC was quite up and down, by Thursday it was very clear to this observer that the game was over, so it presented a very low risk with a good reward opportunity. We don’t advocate over-indexing on such exercises. A single or double (in baseball vernacular) is what we try for, Puts offer the safest way to express a speculative downside view. I don’t recommend direct shorting unless you execute a hedge. I would much rather go with a put-and-be-done. Sniffing out individual candidates to short requires stock-picking instinct but being flexible enough to change the rules to find stocks that will be in trouble. I am building a watch list and trying to create a list of rules. The obvious first filter is sinking revenues and melting profits. Though I often look at such stocks to see if they can turn things around. So here are 3 that I think separate true short candidates from the rest 1) They file a “going concern notice”; that is pretty obvious 2) a stock that completed a reverse split. This is done when a stock falls below a buck (clearly a stock in trouble) and the reverse merger is a last-ditch effort to prevent being delisted. So a stock that is trading at 34 cents, and 10 into 1 reverse split will change the price to $3.40. That is plenty of juice to go for the short side. An example of a stock that filed a going concern notice is Tupperware ( TUP ) the venerable purveyor of plastic containers is still trading but at $1.25. Their products still are sold by individual reps holding Tupperware parties. One would expect that they would convert to eCommerce, but no. It seems that plastic containers can be had for a pittance, I am not sure there is any winning pivot for this company. This is just an example, I am not ready to get on the short side just yet. On general hedging, we did decide to do something I said we weren’t ready to do.
We started a general hedging strategy early, but likely for about a week
My assumption is, is that market participants have continued to shake off every kind of bad news. Or have kept the rally strong in spite of the generally accepted dour expectation of this rally. For example, it was widely accepted as gospel that earnings reports would finally crater. Nothing could be further from the truth. So, as of last week, I solemnly averred that large-scale hedging against the indexes wasn’t yet warranted. So what changed was the huge rally on Thursday that gathered steam toward the end of the day felt completely overbought. So Thursday I announced to the community that I was going to take Puts on the TQQQ. I expected Friday to shift to the negative side, and then we could hold to May 3, for the FOMC meeting and inevitable raise. Friday was a reminder that the market can remain overbought (or oversold) far longer than one can stay solvent. Before last Thursday I assumed that no matter what Powell said the rally would gather more buyers. It is widely expected that this is one-and-done. Now I think there are more questions to be answered. Will Powell say this is not the last hurrah, that they will take up the cudgel once again for the summer? Also while we are at it, Powell could state that no matter how hard the recession is, he is not lowering rates. Contrary to the widely held notion that the Fed will likely lower rates starting at the end of the year. That could cause plenty of bellyaches Wednesday. One last item on the calendar is this coming Friday and the employment numbers for April. The Fed is expecting a weaker level well under 200K to 180K, color me skeptical on that one. So we could have a bit of a sell-off this coming Friday. With all that I thought it prudent to hold on to my Puts on the Triple Bull on the QQQ.
This hedge is of moderate size, I may widen the indexes I hedge with, like having Puts on the SPXL, and perhaps Puts on TNA the Russell small-cap triple bull ETF. I intend to close whatever hedges by this coming Friday. I think that these milestones on the calendar are enough to have a moderate amount of hedging and increase the selection of single-stock shorts. As far as my longs, there were just a few new ones.
My New Trades: Shares in bluebird bio ( BLUE ), Shares in Moderna ( MRNA ), Shares in New York Community Bancorp ( NYCB ), GE (GE) Calls out to January 2024 100 strike.
I got long BLUE because of the progress in their Sickle-Cell genetic treatment. MRNA because of their cancer vaccine tested with Keytruda was viewed positively. NYCB successfully acquired assets from the Sovereign Bank failure, I added shares to my long-term investment account.
Happy Trading!
For further details see:
Blockbuster IPOs Are Coming To Push The Rally Higher