IPOs and Trend Chasing


February 25, 2020

My Dear Reader,

In researching articles for yesterday’s Kevin Prendiville show, going through something like I came across one of the best articles that I’ve read in Forbes and a very long time. Penned by Michael Lewitt, a piece titled “The Harsh Realities Of Corporate America’s Decade-Long Leveraged Buyout” outlines the over leverage of American corporations and what Michael calls the cannibalization of the commercial sector.

“But the most important part of the story is that U.S. corporations are cannibalizing themselves and using debt to cook the corpus. For years, corporations have been the largest buyers of U.S. equities through M&A (including leveraged buyouts which I have long considered a long-term economic disaster for America) and stock buybacks. They effectively conducted a massive leveraged buyout of Corporate America and left the private sector’s balance sheet far more leveraged than a decade ago.”

What essentially this means is that corporations are putting their profits in riskier Equity Funds and In a way is counting on the continued  leveraged buyouts of other companies, that I’ve become popular in the past decade. In the same article, and another thing I want to bring to your attention was The excitement around IPOs in 2018.

“There was a lot of excitement about IPOs in 2018 (and we are hearing more about unicorns emerging from the forest in 2019). Well, 83% of the companies that came public last year were losing money, the highest percentage since the height of the tech bubble.”

Aside from the tech bubble comment, I think this goes back to a topic that we have discussed and have based our discussions on Simon blacks theory of upside down capitalism. The market will always have fads and excitement and this is the driving force in a booming economy, but very rarely do fads last long enough to create massive wealth for others. This is why Warren Buffett will only invest in companies that he understands, and very rarely if ever trend chases.  I’m not sure which way the wind will blow on the stock market, but know that rockier times maybe ahead. 

To your creation and potential,

Kevin Prendiville