After seeing a brutal reception on public exchanges post IPO in 2021, Bank of America strategists think it’s time to strike on a few unloved market newbies.
“Fundamentals remain intact for many of the 2021 IPOs,” says BofA strategists Jill Carey Hall and Thomas Thornton.
The strategists listed 16 companies with an average market cap of $1.22 billion where they believe the fundamentals — notably revenue outlooks — continue to be favorable and perhaps disconnected from their current depressed stock price: 4D Molecular Therapeutics, VectivBio, Procept Biorobotics, Convey Health Solutions, Frontier Group Holdings, Bright Health Group, aka Brands, MeridianLink, EngageSmart, Nuvei, Solo Brands, Singular Genomics Systems, Xometry, NerdWallet, First Watch Restaurant Group, and UiPath.
All of these stocks are down double-digit percentages from their IPO dates in 2021. The biggest losers have been Bright Health (-82%), VectivBio (-70%), and Singular Genomics Systems (-63%). The median decline from their IPO date tallies 28%.
“The market quickly shifted away from risk and toward quality, hurting many of the small cap IPOs and those that have a long roadmap to profitability. That shift and the resulting sell-off in shares suggests opportunity, particularly for those investors able to take a medium to long-term view,” explains the strategists of the lukewarm market reception.
Indeed, the market has inflicted major pain on this new crop of public companies.
The median six-month performance of 2021 IPOs now sits at 14% versus a historical gain of 14%, according to BofA’s research. Meanwhile, the Renaissance IPO ETF has plunged 27% over the past year, badly trailing a 26% gain for the S&P 500.
“The anticipation of higher Fed Funds rates, a historically extreme proportion of early-stage/non-earning companies, plus perhaps some investor fatigue around learning so many new companies took a toll,” says BofA. “Other likely reasons for underperformance include: more low quality/earlier-stage/non-earner IPOs in tandem with a market increasingly focused on quality (an outperforming style within both small and large caps in 2021), sector concentration of IPOs (dominated by healthcare, 2021’s biggest underperforming within small caps) and the macro backdrop (risk-off plus higher rates, which impacts the valuations for stocks with growth way out in the future).”
Despite what they believe to be compelling valuation, BofA’s duo does caution against aggressive buying ahead of potential selling by early investors in these companies.
They add, “Share unlocks and rate hikes do present risks. The typical 180 day lockup means many IPOs done in the second half of 2021 will experience lockup expiration sometime in the next six months. Also, if the market starts to price in more rate hikes, stocks of recent IPOs whose earnings are further out may be vulnerable.”