Stock Market’s ‘Hidden’ Risk Is Wall Street’s IPO Failures

Wall Street never met a popular trend it couldn’t drive to excess. The past twelve months provide an excellent case study. With the underlying mood moving from Covid doldrums to growth euphoria, the stock market became the place to be. Add in the rush to excitement from novice investors with money, and the stage was set.

Today’s IPO “boom” is diverse and widespread. Its “focus” is on investments that might produce an extraordinary return, seemingly without inordinate risk. That is right up Wall Street’s alley – packaging stuff that entices and has a look of safety.

Even the analytical backdrop shifted in Wall Street’s favor. The story became everything. Earnings? Sales? A proven strategy? Those things only put limits on how high a stock could go. It was the dream of wild success that became the popular trend – the driving force behind meme stock actions and Wall Street’s IPO offerings.

The difference in today’s stock market that creates a risk abyss

Unlike overdone popular trends in the past that reversed and produced losses, this year’s reversals have been ignored. The losses continue to grow in number and size, yet that rush to find the next best thing has kept investors and the media from looking back.

Well, the truth will out. Every overdone investment fad fails in the end. When it happens and is recognized, the consequences are serious.

Note: The IPO negatives also put the rest of the stock market at risk. The links are a negative investor mood swing when stocks are priced for growth and success. Chip away at the sunny outlooks for 2022, for instance, and the long-term growth picture deteriorates, compounding the price effect. Moreover, at that point the easy acceptance of negative earnings will dissipate.

So, are we there yet?

We’re close because the amount of damage done is widespread. What adds risk is that this will not be a “typical” bubble popping. This period is unlike any preceding boom, including the pre-Great Recession housing boom with its subprime credit and option-ARM loans that Wall Street packaged into bonds with flawed high ratings. By comparison, that previous period looks tidy and neat.

The results of Wall Street’s IPOs issued since September 1, 2020

Below are the results of the 788 IPOs. The key measures are the 2021 year-to-date performance and the distance from 52-week high. Note also the lack of positive earnings from the IPO companies.

(Data source: Financial Visualizations – FinViz.com)

(See Addendum for additional IPO information and stock charts)

Healthcare – Biotechnology Companies

• 84 IPOs, of which only two have positive earnings
• Median 2021 year-to-date return is (40)% loss, and only 16 of 84 have a gain
• Median position below 52-week high is (55)%, and 74 of the 84 are worse than (20)%

Technology – Software Companies

• 53 IPOs, of which only five have positive earnings
• Median 2021…