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US stock rally drives ‘ludicrous index’ towards dotcom era heights

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Wall Street exuberance barometer charges back towards dotcom boom heights

This article is part of the FT’s Runaway Markets series.

Booming stock prices have inflated one measure of Wall Street exuberance back towards levels seen just before the dotcom bubble burst more than two decades ago.

Shares in 79 companies listed on US stock exchanges have more than doubled in the past three months. These companies — all worth more than $500m — trade at a price-to-sales ratio higher than 10, more than three times the ratio across the benchmark S&P 500 index.

Between 2011 and the start of the sell-off in March that preceded the market rally, that figure only ever crept as high as 13. At the height of the dotcom mania in 2000, 120 companies shared the same characteristics, according to Bespoke Investment Group.

The rise in Bespoke’s “ludicrous index” coincides with rising concern among some investors over what they see as frothy conditions in the world’s biggest equities market. The S&P 500 has soared 75 per cent from its March low even as the country battles through successive surges in coronavirus and an uneven economic recovery.

Well-known investors including Jeremy Grantham have warned that a bubble is brewing in US markets, as stocks race higher and listings of blank-cheque companies, or Spacs, boom.

Runaway Markets

In a series of articles, the FT examines the exuberant start to 2021 across global financial markets

David Kostin, chief US equity strategist at Goldman Sachs, said on Friday that one of the most frequent questions asked by clients of the Wall Street bank is whether US stocks are trading in “bubble” territory.

He said that while the overall market appears to be “reasonably” valued, “pockets of the market have recently demonstrated investor behaviour consistent with bubble-like sentiment”.

The list of highly valued companies that have ascended into Bespoke’s ludicrous index include Farfetch, the $21bn online luxury goods retailer, and Nio, the $97bn Chinese electric vehicle maker that is expected to report a loss of $769m this year on $2.5bn of revenues. Tesla, which has rallied 99 per cent over the past three months, does not make the cut.

Investors have justified the valuations on many fast-growing companies on rock-bottom interest rates, including negative real yields in much of the developed world. Those negative yields have made the prospect of far-off profits more appealing than they would be if interest rates were higher than where they are today.

Howard Marks, the high-profile distressed debt investor, recently told clients that the equations often used to value companies “were not built to handle high-double-digit growth as far as the eye can see, making the valuation of rapid growers a complicated matter.”

Alex Ely, Macquarie Investment Management’s chief investment officer for US growth equities, added that price-to-sales metrics have for years been the way to value faster-growing companies.

“If you use price-to-earnings [ratios] as your only metric you would never have owned Microsoft or Amazon over the last 30 years,” he said. “P/E is a dated metric. This has happened before in history, back in the 40s and 50s book-to-bill was the only thing you used to value a company . . . and then we moved to P/E in the 80s and 90s.”



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Darktrace/UK IPOs: shoes for every occasion

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Unpredictable nature of listing process means ‘greenshoes’ will remain required footwear



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Global IPOs begin 2021 at breakneck pace

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Listings on stock markets around the world are running at a record pace, with both deal numbers and values at their highest levels for the start of any year in at least two decades.

This year, 875 initial public offerings each raising at least $1m have been clinched globally, according to data from Dealogic that cover the last 26 years. That figure far outstrips the previous record set in the final months of the dotcom boom in 2000, when 592 companies raised $1m or more in floats over the same time period.

The deluge of listings has lifted IPO proceeds to a record-setting $230bn this year, well above the previous peak of $80bn set in 2000.

The boom stems largely from a spree of flotations of shell companies known as special purpose acquisition companies, or Spacs, which have accounted for almost half of the fundraising haul through IPOs in 2021. Spacs have no underlying business and instead raise capital to pursue a merger with a privately held business.

But the rise in IPOs also reflects enduring demand for global listings in a year when markets have rallied to new highs, with marquee names such as South Korean ecommerce company Coupang and US dating app Bumble making public debuts.

Globally, proceeds from IPOs in 2021 have already surpassed the full-year totals for 21 of the past 26 years.

Column chart of Number of IPOs, by type showing The number of companies going public has ballooned

“The numbers are encouraging because they’re evidence that people have renewed confidence that public markets are a good way to exit their business,” said Carlton Nelson, co-head of corporate broking at Investec. “It shows that they don’t have to tap into private capital despite it being easier and more efficient than it has been for a long time.”

The listings have been heavily tilted to the US, where Spacs had flourished before running into trouble in recent weeks. Roughly two-thirds of the $230bn of capital raised this year has been through listings in the country. China and Hong Kong have trailed in distant second and third places as the preferred choice for new listings, accounting for 8 per cent and 5 per cent of IPO proceeds, respectively.

Column chart of Global initial public offering proceeds ($bn) showing Companies and Spacs have raised $230bn through IPOs in 2021

Among the big debuts already this year have been SoftBank-backed Coupang, which along with selling shareholders raised $4.6bn, and TikTok’s video-sharing rival Kuaishou, which raised $6.2bn in its Hong Kong listing. Food delivery app Deliveroo also made headlines with its London IPO, which raised $2bn for the company and early backers but was ultimately panned by new investors.

Other large listings are already in the queue, including entertainment group Endeavor, Jessica Alba’s consumer goods business Honest Co and stock trading app Robinhood.

The data do not include direct listings, where companies decline to raise capital when they go public, meaning cryptocurrency exchange Coinbase’s blockbuster debut on the Nasdaq earlier this month is not counted in the figures.

Chris Nicholls, who leads Deloitte’s UK IPO and equity advisory team, said he believed the rest of the year looked promising for a spate of new listings.

“As you see economies emerging from lockdown, there should be a period of strong [economic] growth, which bodes well for this wave continuing for a while longer,” he added.

A key question is how much air will come out of the Spac phenomenon, which ballooned in popularity last year but has “slowed meaningfully” in recent weeks, according to strategists with Goldman Sachs.

Bar chart of Cash raised through initial public offerings, by company nationality ($bn) showing Roughly two-thirds of IPO proceeds have been raised in the US

Staff of the Securities and Exchange Commission earlier this month promised closer scrutiny of the revenue and profit projections from companies that use the vehicles to go public, and the number of new Spac listings has plummeted.

Still, the global economic reopening after the coronavirus pandemic is likely to prompt companies to pursue flotations, Investec’s Nelson said.

“IPOs have a long gestation period, it’s not just when the starting gun has been fired,” he added. “It’s really encouraging to see companies of all shapes and sizes starting those conversations now, even if it’s for a few years’ time in the future.”



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Pepco and Poundland chains target multibillion valuation in IPO

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South African conglomerate Steinhoff is set to raise up to 4.6bn zlotys ($1bn) when it lists its Pepco chain of discount retailers in Warsaw this month in the latest in a series of asset sales.

Pepco, which operates about 3,200 stores in countries including Poland, Romania and Hungary, as well as Poundland in the UK, said on Wednesday that shares in the offering would be priced between 38 zlotys and 46 zlotys.

In total, Steinhoff and members of Pepco’s management team will sell 102.7m shares or 17.9 per cent of Pepco to the public, valuing the company at between 21.9bn zlotys and 26.5bn zlotys. The final price will be set on May 14, and trading will begin on May 26.

A portion of shares will also be placed directly with some of Steinhoff’s lenders, following an earlier agreement between the conglomerate and its creditors.

Andy Bond, the former Asda chief executive who now runs Pepco, intends to sell more than 1m shares in the IPO, worth roughly €9.7m at the midpoint of the price range, though he will be subject to a lock-up period until the end of 2023 thereafter.

Bond said the company planned to open a further 8,000 stores “over the longer term”, but would also keep “a clear focus on costs and delivering additional efficiencies as we grow”.

Pepco’s listing is likely to be one of the biggest this year on the Warsaw exchange, which has seen a flurry of activity since Poland’s dominant ecommerce platform Allegro raised 9.2bn zlotys last year in the country’s largest initial public offering

Steinhoff will initially retain a stake of about 82 per cent, but the group is looking to sell assets to reduce debt after an accounting scandal in 2017. 

It has already sold Bensons for Beds, another UK retailer, to private equity group Alteri, and has an option to sell a further 15.4m shares in Pepco in the offering if investors show sufficient interest. Goldman Sachs and JPMorgan are advising on the IPO.

Pepco’s business heartland is in central Europe, but the group is planning to expand elsewhere on the continent, such as Spain, and is targeting earnings before interest, tax, depreciation and amortisation of more than €1bn within the next “five to seven years”.

In the year to the end of September, it reported sales of €3.5bn and underlying ebitda of €229m. Ebitda was almost a third lower than in the previous 12 months, as the pandemic forced stores to close across Europe.

Like many other discount retailers, Pepco does not trade online, as the small size of the purchases typically made by its customers makes the economics of ecommerce difficult.

The group said last week that sales had risen 4.4 per cent in the six months to the end of March, thanks to the opening of more than 200 new stores. However, on a like-for-like basis, sales were down 2.1 per cent.



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