The initial public offering market is hot. There have been 77 IPOs in 2017 through July 11. That’s 81% ahead of last year at this time, a year in which just 105 companies went public — the lowest total since 2009. Can the torrid pace continue?
While that answer is impossible to know, what’s not is the fact many recent IPOs have seen good appreciation since going public. Year to date through July 10, the Renaissance IPO Index is up 20%, more than double the S&P 500.
Most of this appreciation, I would dare to say, is undeserved.
If you bought shares in any of these seven IPO stocks, I would sell now while things are looking up, because historically, these stocks end up below their IPO price within 24 months.
IPO Stocks to Sell Now: Blue Apron (APRN)
Blue Apron Holdings Inc (NYSE:APRN), the convenient food kit delivery company, hit the market at absolutely the wrong time. Its IPO was just days after Amazon.com, Inc. (NASDAQ:AMZN) announced it was buying Whole Foods Market, Inc. (NASDAQ:WFM) for $13.7 billion — a deal that’s expected to alter the grocery landscape for years to come.
The problem here is Blue Apron’s margins are shrinking at precisely the wrong time. It’s expected that Amazon will enter the food delivery business using Whole Foods as its conduit and when it does, food kits may become a thing of the past.
Blue Apron doesn’t make money and probably won’t for a long time, if ever. It’s a must sell.
IPO Stocks to Sell Now: TPG Pace Holdings (TPGH.UN)
TPG Pace Holdings (NYSE:TPGH.UN) is a blank-check company. Selling 40 million shares June 30 at $10 each, the SPAC is sponsored by San Francisco-based private equity firm TPG, a company with $73 billion in assets under management.
The two TPG people behind TPG Pace are David Bonderman, Chairman, and Karl Peterson, a managing partner at TPG and the person responsible for finding an appropriate company to acquire using the proceeds from its IPO along with any debt necessary to complete a transaction within 27 months of its June 27 offering.
There are two things I don’t like about this IPO. The first is that the founding partners, Bonderman and Peterson and the rest of the gang at TPG get 20% of the company for a mere $25,000 investment. That’s just shy of a $100 million bonus for finding a company to acquire using your money. It’s a nice gig.
The second is that TPG did this back in 2015 raising $450 million, which it used to buy Playa Hotels & Resorts NV (NASDAQ:PLYA) for $1.8 billion in December 2016. The $25,000 invested in 2015 is now worth $87 million.
Private equity already does well without your charity.
IPO Stocks to Sell Now: Five Point Holdings (FPH)
The developer of mixed-use, master-planned residential communities in Central California, priced $14, well below its range of $18-$20. Historical data from IPO expert Jay Ritter suggests companies that file below their price range average 3% first-day returns; Five Point’s first-day return was more than double at 7.4%.
Five Point’s potential for growth is tremendous. Its three major communities when fully built will include 40,000 residential homes and 21 million square feet of commercial real estate space in the cities of Irvine, Valencia, and San Francisco. It’s no wonder that analysts are bullish about its future. However, when it comes to land development, things don’t always go as planned.
Lennar Corporation (NYSE:LEN) owns 41% of Five Point. If you live in California and believe in the potential of these three master-planned communities, you might want to buy Lennar’s stock instead because it’s making a lot of money while Five Point is still in the red.
This isn’t so much a “sell” recommendation as it is a suggestion for a safer play.
IPO Stocks to Sell Now: KKR Real Estate Finance Trust Inc (KREF)
If you bought shares in the June 2010 IPO of KKR & Co. L.P. (NYSE:KKR), as of July 11, 2017, those shares would be worth $18.97, an annual return of 8.8%. Over the same period, you have achieved a 12% annual return by investing in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
Henry Kravis and George Roberts, the guys made famous by the book Barbarians at the Gate, want you to take a piece of their commercial real estate loan business. KKR started KKR Real Estate Finance Trust Inc (NYSE:KREF) with $400 million of its own money in October 2014 along with $438.1 million from third-party investors.
The positive aspect of this offering is that there’s no dilution. The pre-IPO shareholders put in $838 million and own 80% of the shares post-IPO—KKR itself owns 44.2% of KREF post-IPO—while the $220.4 million through new investors own the remaining 20%, making all investors equal. By comparison, the Snap Inc (NYSE:SNAP) IPO saw new investors contribute 50.4% of the equity for 12.5% of the shares for 83.2% dilution.
The negative of this offering is that KKR is adept at sucking fees out of almost any investment — it is private equity, after all — so you can sure it will win whether KREF is a smashing success or not. IPOs are back, so KKR is trying to strike while the iron’s hot. I’d strongly suggest you take a pass.
IPO Stocks to Sell Now: Gardner Denver Holdings (GDI)
I’m going to sound like a broken record here but given Gardner Denver Holdings Inc (NYSE:GDI) is sponsored by KKR, I’d stay away from this one as well. Out of the gate at a reasonable clip — a 5.5% first-day return and up 8.7% since May 12 — Gardner Denver, an industrial firm specializing in compressed air technologies, was taken private by KKR in July 2013. KKR paid $3.9 billion including debt.
In 2012, the year before KKRs takeover, Gardner Denver had $373.8 million in operating income from $2.4 billion in revenue. At the end of December 2012, it had $366.9 million in long-term debt. As of December 31, 2016, Gardner Denver had operating income of $104.3 million, $1.9 billion in revenue, and $2.8 billion in long-term debt.
These are not numbers indicative of an improving business. Sure, the energy market’s been walloped and represents 32% of its overall business, but adding almost eight times the debt was far more burdensome to the health of Gardner Denver’s business. KKR has turned this company into a dog. Stay away.
IPO Stocks to Sell Now: Floor & Decor Holdings (FND)
Can anyone say Lumber Liquidators Holdings Inc (NYSE:LL), the sequel? Right there on page 116 of the Floor & Decor Holdings Inc (NYSE:FND) prospectus is the name Lumber Liquidators, listed among 13 other retail companies, in a discussion about executive compensation.
The big difference between FND and LL is that Floor & Decor has been taken public by its private-equity owner while Lumber Liquidators was taken public back in 2007 by its founder Tom Sullivan along with a private equity minority partner. Regarding revenue, Floor & Decor is a much larger business with nearly three times as much on the top line as Lumber Liquidators at the time of their respective IPOs. However, in terms of operating income, their operating margins were identical at 6.5%.
Another big difference between the two IPOs is the level of debt before going public. Lumber Liquidators had net debt of $2.5 million compared to $386.9 million for Floor & Decor. Even worse, Floor & Decor paid out a $202.5 million special dividend in September 2016 as part of its refinancing; money that could have been used for debt repayment.
Floor & Decor will have no money from its IPO proceeds to grow its business while Lumber Liquidators had almost $25 million available for growth purposes.
Up 81.5% since its April IPO through July 11, Floor & Decor is trading at 85 times its 2016 earnings per share of 45 cents. I don’t care how great a retailer it is; it’s just an insane valuation.
IPO Stocks to Sell Now: Altice USA (ATUS)
It’s possible some investors bought Altice USA Inc (NYSE:ATUS) stock after its June 21 IPO, mistaking the Dutch cable company’s U.S. business for T-Mobile US Inc (NASDAQ:TMUS), the U.S. wireless business of German telecom giant Deutsche Telekom AG (ADR) (OTCMKTS:DTEGY).
Ok, so that’s a stretch, but do investors really need another cable and internet investment? I don’t think so.
If you bought shares in the IPO, do yourself a favor and sell them, using the proceeds to buy Comcast Corporation (NASDAQ:CMCSA) in its place.
In five years you’ll thank me. Quality always wins out.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.