Watch out below! Right now the initial public offering (IPO) market is the frothiest it’s been in years. We haven’t seen investors clamoring for shares of money-losing companies like this for at least a quarter century.
Traditionally, this is a sign for lower stock prices ahead…
To give you a better idea of just how bubbly the IPO market is today, the percentage of unprofitable IPOs over the past six months has hit 78%. This exceeds the stock market tops of both 2000 and 2007.
In the 2000 top, 76% of IPOs had been unprofitable for six months prior. Investors were all lathered up about new and emerging Internet companies so absurd, they sported sock puppets as mascots!
We all know how badly that ended. Many investors lost nearly everything betting on new paradigms and eyeballs. They got sucked into the glossy growth stories and made-up metrics.
By 2007, it seemed like most of them had forgotten as they moved on to the next bubble. When that market reached its top, the percentage of money-losing ventures that went public the six months prior was 65%.
You know what happened. The stock market imploded, and investors got burned again.
Still, investors are behaving as if the third time’s the charm. Some people just don’t learn!
The stock market has gone nearly straight up for six years. In this lackadaisical period, companies are acting as if the normal economic rules (and concerns) don’t matter.
Here’s an example: Companies like Facebook have paid tens of billions of dollars to acquire businesses that continue to lose money. In some cases, these businesses have no intention of charging their customers to use their services.
At both market bottoms in 2003 and 2009, the percentages of IPOs that were losing money were… 0%!!! Just to give you some context for comparison!
There’s two reasons for that: Companies (and investors) are pretty wary following a major crash… and not many are itching to go public after one.
Still, the IPO market serves as a solid indicator for when to get in and get out of the stock market. Get out at the market high when IPOs are losing money… and get in at the market bottom when they’re not.