I’ve been on radio silence lately. There hasn’t been much to write about, although I note that the vapor equity market has seen considerable supply pressure this month.
The peak of the dot-com boom (at least as far as the stock market is concerned) was in February 2000 when the Nasdaq peaked at 5000 and you had quite a flurry of initial public offerings, the most notable being the IPO of Palm (which was owned by 3Com at the time).
After that, the trend virtually deteriorated as valuations were unsupported and liquidity was sucked from the markets. Old value stocks (a good example being Berkshire, but pretty much any company with real earnings that had nothing to do with fiber optics, dot-com networks, or e-commerce) managed to hold onto their value, and in many cases some have thrived in the ensuing carnage.
Investors in 2000 who had kept their portfolios away from previous high-level sectors would have survived to participate in the next surge (which, in the US, was all about real estate). Indeed, an investor who is successful over multiple market cycles needs to know which sectors to avoid at any given time – clearly taking permanent capital losses (someone investing in Pets.com? EToys? CMGI?) is draining your ability to invest in the future.
We fast forward to today, where technology, software and everything related to Covid (facilitating virtual work, vaccines, etc.) is collapsing.
There’s a lot to review, but I’ll keep it for Canada. There’s a lot more going on in the US (eg ARKK stuff, for example). Either way, the biggest casualty is the high-flying Shopify (SHOP.TO), which was once the #1 ranking on the TSX index, but not anymore! They are now back in third place under Royal Bank and Toronto Dominion.
Within 2 months, they traded at a high of C$2,200/share and have now fallen to around C$1,100, a peak to low of 50%. Anyone who invested in the company since June 2000 would have lost money. Imagine if you bought shares of this thing at $1,800 and now a third of your equity is gone…
Another top flight was Lightspeed POS (LSPD.TO):
The peak-to-trough ratio here was even more extreme – from $160/share to around $37 today – a drop of 77%.
Another highly touted IPO was AbCellera (Nasdaq: ABCL) – a Canadian company that went public on the Nasdaq. They went public at $20/share and traded as high as $70 on the day of their IPO, but since then have dropped to $8.50 today, a loss of almost 90 % peak to trough.
Looking at some other recent TSX IPOs we have, as of September 2021:
Bringing the cards of each of them, it’s not a pretty picture. Another notable busted IPO I have reviewed in the past was Farmer’s Edge (TSX:FDGE) and they are down about 85% since their IPO. Another that I didn’t write about but was an obvious avoidance in my books was Eupraxia (TSX: EPRX) whose underwriters I must commend for throwing this company up to unsuspecting retail shareholders.
There are a few lessons to be learned here, but an obvious lesson is that just because something is down 50% or 80% doesn’t mean it’s always “cheap”.
Many of these high-flying, headline-grabbing stocks are trading at ultra-premium valuations. Take Shopify – 50% drop from peak to trough. Although the company is making money, it is still far from a reasonable multiple of its existing market valuation. An investor always pays a huge premium for supposed future growth – and the company has to exceed that amount for an investor to receive a payout (never mind a dividend!).
Even in the case of companies like Lightspeed which are down 80%, it is very difficult to determine whether an investor will ultimately see any returns – they are still losing money in their trades.
Many people started investing in the time of Covid-19. Many of them grabbed the right title at the right time (eg Gamestop) and probably started dreaming of trading their way to riches. Without the foundations of understanding company fundamentals, inevitably these hordes of retail investors simply traded companies on perceived sentiment rather than earning power. Without having a general idea of an entry and exit point, one could rationalize GME at $100, $200, $300, etc., or Shopify at $1,500, $1,700, etc., and trade in done blind. A similar argument can also be made for cryptocurrency markets – functionally a zero-sum game.
A good question for these new traders is: do they have the discipline to pull through? Or will they try to hold on and break even? Or will they drop on average as these high-level stocks fall back to earth? If the 2000-2003 pattern is similar this time around, there will be a lot of people holding onto stocks that are still depreciating and the current wave of hype will come to an end.
Keep in mind the simplicity of the math – if something goes from $100 to $50, there is a 50% decrease in value. If you buy at $50 and it goes down to $25, the result is the same: a 50% loss (and if you started at $100, it’s a 75% loss). In many of these cases, the companies trajectory will be heading towards zero, and no matter how much “reduction from the 52-week high” you buy the stock at, you will suffer losses if/when it heads towards zero .
Security in the markets resides in companies that produce sustainable cash flows. You will still take a considerable hit if the company in question is trading at a very high multiple. The maximum security is in companies that trade at low cash flow multiples and those that are not dependent on rolling over excess amounts of debt financing. There’s not much security there, but astute readers of this site have picked up clues here and there as to what offers some degree of security.