BackAlibaba-sized hole blown in Nasdaq 100 as IPOs unleash new stock
About $150 billion has been erased from Nasdaq 100 as investors sold last year's winners such as Facebook and Netflix
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How much has been erased from US technology shares since they peaked at the start of March? An amount almost equal to the estimated value of a company that is getting ready to enter the market: Alibaba Group Holding Inc.
While probably a coincidence, it’s one that illustrates a concern for investors in some industries. With buy-backs levelling off, equity offerings are on pace for the busiest year in a decade as companies from Alibaba to King Digital Entertainment Plc sell in a market where prices are 20% above the 2007 level. In other words, patterns are in place that may result in an oversupply of stock and an under supply of owners.
The deluge is still a ways off. Squeezed by share repurchases, the net supply of equities fell by $837.5 billion from March 2010 through the end of last year, according to data from Venice, Florida-based Ned Davis Research Inc. But just as individuals return to stocks after missing most of the bull market, concern is growing that initial public offerings (IPOs) will spur a glut of shares in the fastest-growing industries.
“Although it’s true for the level of the overall market that supply is not a problem, I do think that in a particular portion of technology, supply is really being quite concentrated," said Michael Shaoul, who oversees more than $20 billion as chief executive officer at Marketfield Asset Management Llc in New York, on 2 May. “It’s certainly possible that you can overwhelm the overall demand of the market for a particular sector."
New offerings
New share offerings totalled $87 billion in the first four months of 2014, about the same as the year-earlier period, according to Sausalito, California-based TrimTabs Investment Research Inc. At the same time, share buying announced by corporations, which has offset the equity created by IPOs, totalled about $255 billion in the first four months, compared with $355 billion a year ago.
While the Dow Jones Industrial Average reached a record last week and the Standard and Poor’s 500 Index briefly eclipsed one, the Nasdaq 100 remains 3.7% below its 14-year high on 5 March. About $150 billion has been erased from the gauge as investors sold last year’s winners such as Facebook Inc. and Netflix Inc., according to the data compiled by Bloomberg.
Alibaba, China’s largest e-commerce company, is planning what could be the biggest US public debut ever, with a market value that may exceed 95% of the S&P 500. The Hangzhou, China-based firm is worth about $168 billion, according to the average estimate of 12 analysts surveyed by Bloomberg News last month, though the IPO will raise much less.
Embracing capital
Chief executive officers are taking advantage of record prices to raise money and do takeovers after the bull market entered its sixth year. Shares have been buoyed by three rounds of monetary stimulus from the Federal Reserve and corporate buy-backs that amounted to $1.7 trillion since the market’s bottom in 2009.
“Companies seem to be rebounding, re-embracing capital markets, said Kristina Hooper, a US investment strategist at Allianz Global Investors in New York, in a phone interview on 30 April. The firm oversees $475 billion. “There is risk involved, and it could be aggravated by the fact that this happens fairly quickly."
The value of takeovers announced in 2014 hit $1 trillion on 28 April, reaching the level at the fastest pace in seven years.
More than 180 companies announced IPOs from January through April, while Nielsen Holdings NV and FireEye Inc. are among 317 firms selling additional shares, according to data compiled by Bloomberg. Should the pace be sustained, it would make 2014 the busiest year since at least 2002, data compiled by Bloomberg show.
IPO supply
“The increased deal making is emblematic of confidence," said Joseph Quinlan, the chief market strategist at Bank of America Corp’s US Trust, which oversees about $378 billion, by phone from New York on 1 May. “There is a lot of search for good company stories. If an IPO can bring that to the market and investors feel that way, then the supply will be consumed."
The biggest IPOs have coincided with periods of weakness in the US stock market over the last six years, coincidentally or not. In May 2012, when Facebook carried out the largest offering by a technology company, the S&P 500 dropped 6.3% for the worst retreat in eight months.
The S&P 500 fell 0.2% in November 2010 amid General Motors Co. $18 billion share sale. The market fared worse when Visa Inc. raised $20 billion in March 2008 for the largest American IPO. The benchmark index slid 0.6% that month.
Liquidity squeeze
“Most money managers are generally fully invested and so one of the issues is that for these mega ones, the buy side has to free up some liquidity to buy the new IPO," said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston, by phone on 1 May. The firm oversees about $5 billion.
“This is the only tech name you’ve got to own," he said. “The hype will be for the individual guys to buy. If it doesn’t do well, what happens is it just kills the enthusiasm for IPOs."
While companies such as Alibaba and King Digital are embracing capital raising, Apple Inc. and Wells Fargo and Co. are boosting buy-backs after hoarding cash for five years.
Share repurchases among S&P 500 companies increased 19% to $475.6 billion in 2013, the second highest on record, according to the data compiled by S&P. Cash at companies excluding banks and utilities reached an all-time high of $1.3 trillion in the fourth quarter, the data showed.
Individuals, who withdrew about $260 billion during the four years through 2012, are returning to equities after watching the S&P 500 more than double in an advance that surpassed the five-year climb that sent the index to a record in October 2007. Mutual funds that buy American equity took in about $18 billion in 2013, according to the data from the Investment Company Institute. Exchange-traded funds received almost $140 billion, data compiled by Bloomberg show.
Mitigating factor
“Investors are getting off the sideline and into the equity market," said Randy Bateman, who oversees $4 billion as chief investment officer of Huntington Asset Advisors in Columbus, Ohio, phone on 1 May. “You get a shrinking supply and demand stays the same or gets bigger, what’s the mitigating factor? It’s price, and price is going to go up."
Investors have turned sour on IPOs as a drop in risk appetite spurred a shift out of Internet and bio-technology stocks that led the S&P 500 to its best yearly performance since 1997.
The Bloomberg IPO index has lost 8% from its March high. King Digital, the maker of the Candy Crush smart phone game, has tumbled 22% since raising $500 million in March. Concert Pharmaceuticals Inc., a bio-technology company that went public in February, has slipped 33%.
Internet, bio-tech
Nasdaq indexes of Internet and bio-tech companies had slumped more than 19% from their peaks this year. By contrast, utilities, with earnings less tied to economic swings and a dividend yield that beat all but one of the 10 S&P 500 groups, have performed the best, rallying 12% in 2014.
Facebook, trading at 42 times estimated profit, has spent $21 billion since February to acquire virtual reality and messaging technology, both times using shares that are more expensive than 96% of those in the S&P 500.
The Menlo Park, California-based social-networking service is among almost 1,000 companies that went public since 2012. The stock has dropped 16% from its March peak, trimming its gain for the year to 11%.
“The IPO calendar will continue to build to feed those rejuvenated animal spirits," said Howard Ward, chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc. in an interview on 30 April. His firm oversees about $47 billion. “Enjoy it while it lasts." Bloomberg
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