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The quality of IPOs ‘has been steadily declining,’ portfolio manager says

Kayne Anderson Rudnick Portfolio Manager Julie Biel joins Yahoo Finance Live to discuss IPOs and the overall stock market.

Video Transcript

ZACK GUZMAN: For more on that prospect and what investors should be bracing for, I want to bring on Julie Bieil. The Kayne Anderson Rudnick portfolio manager joins us right now. And Julie, I just mention it because they tend to be the highest fliers. In good times, we see a lot of rallies and some of those new entrants. In bad times, that can reverse quite quickly. So when you're looking ahead to 2022, what should maybe investors be taking from that? And how do you see the year shaping up?

JULIE BIEL: Well, I think what we've seen is an extension of valuations. It's most obvious in the tech sector, but it's actually been across sectors. And I think the quality of IPOs that are actually coming to market has been steadily declining, the sizes of banks that are bringing them. And now it's the mid-tier banks that are bringing IPOs. That's also not a great sign for forward-looking indicators of this rally.

And so we are a little bit concerned about what is the underlying quality of businesses coming to the fore. And for us, we're focusing thus on businesses that can do well, especially when you think about a rising rate environment. So I think valuations are going to start to matter a little bit more than they have in the past. And I think that's a positive thing for the market.

- Julie, you've noted something in the notes you sent us, saying you look pretty smart at the end of the year if you bought the dip and then ask questions later. If we're talking specifically about the tech trade, we've seen a number of sectors-- I mean, today, semis is just one example. But we've seen them pull back significantly, number one, on the valuation concerns, but also these growth stocks, the concern about how they're likely to get hit as a result of a higher-rate environment. What are some of these pullbacks that you've been watching that you think particularly offer good value now that we've seen some of those declines?

JULIE BIEL: So yeah, I think in cases where the pullbacks have been indiscriminate-- so I would think about something like right after Thanksgiving, we had that massive drawdown, and both quality and low quality came down. And so those are the opportunities that we would look at where there's a real chance to get at a quality name at a discount. But generally speaking, the declines in the tech sector have been among lower-quality names, more speculative names, and then more cyclical names. And so we think that's just the cream rising to the top. That's what we would expect, especially as we get towards the later stages of a cycle, which a lot of the market indices have been showing us.

ZACK GUZMAN: I guess the other big things to watch, of course, as we always do watch, but this year being an election year, watching what plays out in DC. And you flagged two things not only in terms of, I guess, what happens with Build Back Better plan, but also what happens when it comes to regulation, and particularly how that might impact some of the crypto names out there too. I mean, what are some of the takeaways there in terms of how those two things could go, how those coins land on the ground, how investors maybe should be playing around with some of the volatility there?

JULIE BIEL: Yeah, I think it's important to keep in mind we've been very fixated on Build Back Better and what it means. And that makes sense because so much of the economic growth that we've had in the last 18 months has been really supported by the federal government. What I'm thinking more in terms of is what's happening on the regulatory front, because we have newly installed regulators who are thoughtful and very motivated to have an impact.

On the FTC side, Lina Khan, I think, is going to have a real impact in terms of looking at the level of concentration, particularly on the tech sector. But there are other opportunities for her as well. She's been inundated with the number of M&A transactions coming through the pipe. So I think it's an opportunity for her to make her mark with a few landmark cases, a little bit like what's happening in the Elizabeth Holmes trial where it's a high-profile case, and it causes people to rethink some of the actions that they've taken under more lax regulatory environments.

On the crypto side, Gary Gensler has been very outright in talking about the risk to the small investor. And I think that that lens really is going to inhibit some of the more predatory practices that crypto can sometimes fall under because it's so under-regulated. So generally speaking, I think regulation is a positive for crypto longer term. But in the short term, I think it will impact those that are actually supporting the crypto markets, so the exchanges, et cetera.