I’m frankly appalled by what I’m seeing in the IPO marketplace right now. Start with the fact total IPO volume is surging thanks to the “Everything Bubble” financing environment, explains Mike Larson, editor of Safe Money Report.
A whopping 120 companies have raised just over $35 billion through the first half of the year on U.S. stock exchanges. That puts 2018 on track to be the second-busiest IPO year (besides 2012) since … drumroll please … the 2000 peak of the dot-com bubble!
If the companies coming out of the chute were solid ones with long histories of profitable operations and time-tested business models, I wouldn’t worry. But the sludge that’s running down Wall Street is entirely different!
Take a company called iQIYI (
What about the future? It must look better or the “Netflix of China” wouldn’t have been able to go public in a March IPO that raised $2.25 billion, right? Nope! As of June, analysts were forecasting losses to surge to $789 million in 2018 and $723 million in 2019.
Again, let me repeat that for emphasis: 8 years of operation … 8 years of losses … and another $1.5-billion-plus in losses likely over the next 2 years (at least).
Yet for a time, investors piled into IQ shares like the company was spinning straw into gold! The stock soared from its $18 IPO price to more than $46 in mid-June, a gain of 155% in just a few weeks.
But IQ is far from alone. Take Dropbox (
Those are just the ones you’ve probably heard of because they get so much digital ink. There are plenty of also-rans and “Me Too” companies slinging their shares, just like two decades ago.
Take HyreCar (
Or how about DOMO Inc. (
Then there’s Bilibili (
Another Chinese tech play, the “used car e-commerce platform” Uxin (
Of course, money-losing, traditional tech companies aren’t the only wing-and-a-prayer firms with their hands out. Money-losing biotechs have been raising (and burning through!) gobs of money, too.
In a single 24-hour period — June 20-21 — five biotechs priced their IPOs. They raised a total of around $460 million, making it the most active day for biotech deals in U.S. history. Yet not a single one of them was profitable!
That included Avrobio (
So, what do I think about the tech IPO mania? What do I believe the future holds for many of these companies, the ones gobbling up billions of dollars in capital like Pac-Man on a blue ghost bender?
Well, more than half the dot-com darlings of the late 1990s eventually went up in smoke. Not every one of the companies I just mentioned is destined for the dustbin of history.
But given the gobs and gobs of red ink they’re racking up, and the half-baked business models many of them are pursuing, there will be financial carnage. Lots of it. Heck, it may not even take all that long to get started. That’s because many of the stocks are already tanking!
Bottom line: When you combine the IPO frenzy with all the other manic market behavior I’ve been highlighting, you don’t exactly get a happy-go-lucky picture of market stability. Instead, it looks exactly like what you’d expect to see in the final death throes of a deflating “Everything Bubble.”
Wall Street analysts and the mainstream financial press want to talk FANG, FANG, FANG all day long. That’s because these “hot” stocks boost their ratings, commissions and fund inflows.
But with the yield curve collapsing … the Federal Reserve raising rates steadily … and signs of credit stress increasing by the day, mark my words: Those ultra-high-risk companies are likely headed straight into a brick wall So, the only sensible course of action in my book is to:
1) Continue to maintain a much higher cash position than in years past. The model portfolio currently has about 40% in cash, up sharply from our previous fully invested stance.
2) Move up the quality scale for any remaining stocks you hold. By that, I mean get rid of higher-risk garbage names like those I just mentioned. Focus instead on higher-rated, higher-yielding, more stable names.
3) Hedge against weakness — or target downside profits — using specialized tools like inverse ETFs. The ProShares UltraShort Financials (
This article was originally published by MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.