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'A mix of macro factors' made 2021 a record year for IPOs: Strategist

Damanick Dantes, Portfolio Director at Cannon Advisors, joins Yahoo Finance Live to discuss the record-breaking IPO surge in 2021 where more than 1,000 companies entered the market.

Video Transcript

- 2021 already shaping up to be one of the most active IPO years.

- Talking about companies like Warby Parker, Allbirds.

- We went for a run with the team. We ran to the New York Stock Exchange, got to ring the opening bell. What else can you dream of?

- We're going to have this IPO bringing Vizio into the next chapter. So we're really excited about where we're going from here.

- This is going to be a super, super dynamic year for us. And you're going to see the changes in terms of market share and growth and all that.

- We wanted to create an amazing foundation. So we did some things the hard way.

- And we wanted to create a brand that really disrupted fast food and made it healthy.

- And so we were able to grow in spite of the challenges and the headwinds from the pandemic. And frankly, we feel like we're emerging stronger.

- In the end, it's about bringing a perfect product and the perfect running feeling to the market. And this is what we're focused on.


BRIAN SOZZI: As you saw there, this year has been a banner one for IPOs as new listings have hit record highs. But the performance of the stocks following the glitzy market debuts has been anything but impressive. So what's on tap for next year? Damanick Dantes is a portfolio director at Cannon Advisors and joins us now. Dominic, nice to see you this morning here. Why do you think these companies-- a lot of big-name, high-profile companies, in some respects where investors have been waiting many years for these companies to go public-- why are these stocks now underperforming the broader market?

DAMANICK DANTES: Yeah, it's a mix of macro factors. We had a low-interest-rate environment, enhanced liquidity in the financial markets, and good valuations in the secondary market. So I think that encouraged a lot of companies to go public into this frothy environment. It's as expected, and you see a lot of that froth activity happening. But it's also the spirit of entrepreneurship. We have a positive seasonality effect in the stock market now, and it's a good time to go public.

JULIE HYMAN: Yeah, it has been a good time to go public. But as Sozz said, not for everybody, right? And it was a better time to go public in the beginning of the year than it has been in the latter half of the year. You have an interesting chart that you sent us in one of your notes that looks at the IPO ETF, which is that Renaissance ETF that tracks IPOs versus the S&P 500, a ratio of one to the other. And we really saw a midyear to latter-year rollover in that.

DAMANICK DANTES: Yeah, exactly. 2020 was a boost, post-pandemic lows, surge, and buying activity across the board. And when you really look at the speculative aspect of the market, those tend to move really well. They're high beta. They tend to stick with the market. And we saw that in the Renaissance IPO ETF.

Unfortunately, this year, it gave back some of that gains. It consolidated on the technical aspect. And we're seeing some of the oversold conditions pop up. So we look at momentum and trend indicators, and they show that the selling activity is starting to slow down into positive seasonal influences towards the end of the year. So we're seeing some of that buy-the-dip mentality that's supporting it for now.

BRIAN SOZZI: Dominic, how do you know-- if an investor wants to come in here in early January and start nibbling at some of these underperforming companies from this year, what should they be looking for just from a fundamental perspective?

DAMANICK DANTES: Yeah, so we really don't look at the fundamentals too much. We focus on the technicals. So these are price-driven moves. But a fundamental investor might look for the long term and might want to distract itself from the noise. So there's a lot of noise when you go public. The stock market tends to figure out what's the valuation for these companies.

And it's tough to call when a lot of them are not profitable. So you really have to do your own due diligence and look at the long-term factors. Remove yourself from the day-to-day price fluctuations and really look at the founders, the fundamentals, and all of that, and figure out the right valuation for it.

JULIE HYMAN: So talking about some of these recent IPOs and what might be oversold now going into next year, you send us a list of those. There's a couple that stand out to me. Certainly, Allbirds stands out to me as one that has been trending on our site recently. The stock's actually up 5% today. Rivian's on that list as well. So when you see those kinds of oversold indicators, what does that imply about a bounce and how long a bounce might last?

DAMANICK DANTES: So typically about two weeks or so given the seasonal influences. Now we have the Santa Claus rally that happens within the last five trading days and into maybe the first week of January. So again, you look at the speculative aspects of the market. Those tend to move really well when the market itself is well-positioned for a rally. So you're seeing a lot of these speculative buyers come back in and take advantage of those oversold support levels.

And what oversold basically means is that momentum is rising in a downtrend. So that just means that the sellers are starting to exit their positions. And you're also seeing a lot of lockups tend to expire for a lot of these names. I think it was [INAUDIBLE] Therapeutics, DD Global, Toric Holdings. So when you see those IPO lockups happen around that time, there's a lot of selling, pricing in of that news.

And then what happens then is you see some buyers tend to come back in and speculate on the upside. So you might see a short-term bounce. It's still within the context of a downtrend on the short term from the IPO listing date, so you might see some of that short-term buying activities manifest.

BRIAN SOZZI: And Damanick, how do you think some IPOs potentially coming to market next year might perform? Of course, obviously, we don't know the companies. But do you think the market backdrop is such that these companies, whoever comes to market, might be better received by investors than the companies from this year?

DAMANICK DANTES: Less so for next year relative to this year, I think. We have a confluence of macro factors that might cause some underperformance in terms of the overall market that we're looking at very closely, whereas this year and the prior year was very strong for going public. However, PitchBook has a lot of data that shows that a lot of the private market companies are at attractive valuations. So there's a lot of activity in the pipeline that might keep IPO activities elevated in terms of listing. But in terms of performance and valuations, we might see less or lower valuations than the prior two years.

JULIE HYMAN: You know, Damanick, we were just talking about the SPAC picture as part of the debut picture this year. Has there been any difference in how you have seen SPACs versus IPOs versus direct listings trade? Have the technicals looked different for these different types of debuts, or is it pretty much all the same?

DAMANICK DANTES: Pretty much all the same. It's tough to do a technical picture on the SPAC in terms of performance. But what you generally see is the areas of mergers and acquisitions that the SPACs are doing and the IPOs that are coming out have been in the future-focued innovation environment. So a lot of that has been health care, therapeutics, space exploration, you name it. So it's a lot of these future-focused names. And you're seeing that from a lot of the pitches from the entrepreneurs. You showed the reel earlier about folks talking about their business plans.

So they're really looking over the long term, which is what the investors should be looking at when they go through the fundamentals. Is there going to be long-term demand? Is there going to be a paradigm shift in terms of consumption? So a lot of these are to be determined, as it should be. So they'll be trading accordingly to that over the long term.

BRIAN SOZZI: All right. We'll leave it there. Damanick Dantes is portfolio director at Cannon Advisors. Appreciate you coming on. Have a happy new year.