IPO landscape, plus downside protection, risky borrowers, and the 2020s=1920s ??
The Sandbox Daily (3.27.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
IPO landscape
downside protection appears attractively priced
risky borrowers tap credit markets
2020's just like the 1920's?
Let’s dig in.
Markets in review
EQUITIES: Russell 2000 +2.13% | Dow +1.22% | S&P 500 +0.86% | Nasdaq 100 +0.39%
FIXED INCOME: Barclays Agg Bond +0.33% | High Yield +0.53% | 2yr UST 4.568% | 10yr UST 4.188%
COMMODITIES: Brent Crude +0.07% to $86.31/barrel. Gold +0.74% to $2,215.4/oz.
BITCOIN: -0.89% to $69,527
US DOLLAR INDEX: +0.01% to 104.293
CBOE EQUITY PUT/CALL RATIO: 0.64
VIX: -3.47% to 12.78
Quote of the day
“The market may be crazy, but that doesn't make you a psychiatrist.”
- Meir Statman
IPO landscape
We’ve just seen two tech companies perform well during their market debuts last week after a long drought of initial public offerings (IPOs) of any kind.
Astera Labs ($ALAB) and Reddit ($RDDT) rallied 48% and 72%, respectively, from their IPO price through their 1st day of trading – both essentially skipping right over the small- and mid-cap valuation range to land at $12B and $9B, respectively.
While the IPO window has not fully re-emerged yet, relatively new public companies (IPOs within the last 3 years) have in the aggregate finally recovered from 2022’s bear market.
To get a better sense of the IPO recovery, here are the top 10 holdings of the Renaissance IPO ETF ($IPO) along with their weightings, description and how they’ve performed year-to-date. Public equity investors want to see this sustained momentum to know they can make money from newly minted public companies.
Back to Astera Labs ($ALAB) and Reddit ($RDDT), for a minute.
Given their soaring debuts and the speculative frenzy around former President Trump’s SPAC public debut ($DJT) this week, should investors be worried about such large 1st-day returns for newly public companies in terms of what it may say about a nascent market bubble?
On the one hand, Astera Labs and Reddit’s debut performances were reminiscent of frothy times in the late 1990s and again in 2021.
On the other hand, when reviewing the mean 1st-day returns of IPOs going back to 1980, we are currently well below the long-run average of an 18.9% 1st day pop and well below prior speculative peaks.
The more successful IPO debuts and follow-on trading activity the market sees, the more other companies will follow and go public. This should be viewed as a healthy development after the IPO window has been largely shut over the past two years.
Source: DataTrek Research
Downside protection appears attractively priced
For investors concerned about overvaluation or risks to the economic outlook, downside protection appears attractively priced.
Implied 6-month volatility currently equals 13, ranking in the 18th percentile relative to the past 30 years for the market-cap weighted index and 15 years for the equal-weighted index.
While technical factors may be contributing to the low volatility regime today, the current level of implied volatility is 35% lower than the typical episode at current valuations.
Source: Goldman Sachs Global Investment Research
Risky borrowers tap credit markets
Demand in the junk bond market remains insatiable right now.
U.S. companies are tapping the High Yield bond market as the extra yield investors demand over Treasuries hovers at a 2-year low.
“The nominal cost of borrowing has come down dramatically since the end of October, and the market is very receptive to new issuance,” said Bill Zox, portfolio manager at Brandywine Global Investment Management. “Borrowers are doing the right thing by taking advantage of that.”
Source: Bloomberg
2020's just like the 1920's?
The world may not always be perfect, but sometimes we all need a bit of perspective.
Source: Ben Carlson, CFA
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.