Stocktake: WeWork not alone in its IPO woes
‘Elizabeth Warren correction’ hits markets, and earnings season likely to be uninspiring
WeWork shelved its IPO plans after its private valuation of $47 billion was reportedly slashed to $10 billion as unimpressed investors steered clear. Photograph: Timothy Clary/AFP via Getty Images
As initial price offerings (IPO) attempts go, WeWork’s failed flotation was as bad as it gets – its private valuation of $47 billion was reportedly slashed to $10 billion as unimpressed investors steered clear, before WeWork eventually shelved its plans.
That said, WeWork isn’t the only company to lose out in what’s been a very poor year for IPOs. Uber shares have lost a third of their value; shares in Uber’s rival, Lyft, have more than halved since its March IPO. Other much-hyped IPOs like indoor fitness brand Peloton and workplace messaging service Slack have also disappointed.
There have also been big winners, of course, like plant-based meat alternative stock Beyond Meat and videoconferencing software company Zoom. Overall, however, investors have become more discriminating and are “increasingly wary of lofty valuations”, a FactSet report noted last week.
There were only 50 IPOs in the third quarter, according to FactSet, a 40 per cent drop from the previous quarter and a 35 per cent decline from a year earlier. Total proceeds were less than half those recorded in the second quarter. A decent number of IPOs are in the pipeline in coming quarters but global uncertainty due to Brexit and ongoing trade tensions “have the potential to squash the IPO market”, cautions FactSet. In any event, companies looking to go public must prove what WeWork couldn’t – that they’re well-run and on the road to profit.
Markets taking note of Elizabeth Warren
Donald Trump’s impact on stocks has been much discussed, but attention is increasingly focusing on another politician – Democrat presidential hopeful Elizabeth Warren.
Warren has caught Joe Biden in the polls, is the overwhelming frontrunner according to predictions market PredictIt and is odds-on with Paddy Power to be the Democrat nominee. Markets have taken note, with Oppenheimer dubbing the recent downturn in bank stocks the “Warren correction”.
Warren’s aggressive calls for a wealth tax and heightened regulation, especially in the financial and tech sectors, have spooked many on Wall Street. Billionaire hedge fund manager Leon Cooperman sees a Warren presidency as ushering in a year-long bear market. That’s unlikely, according to a RBC Capital Markets note predicting any pain would be “temporary”.
Still, further Warren gains could drive stock market volatility early next year, says RBC. A spate of other analyst reports have recently focused on Warren’s potential market impact – a subject investors may be hearing a lot more about in the coming months.
Ordinary investors are spooked
The recent market pullback has been minor, but make no mistake – ordinary investors are spooked. Only 20 per cent of investors described themselves as bullish in the latest American Association of Individual Investors (AAII) poll – lower than that seen last December, when stocks fell 20 per cent, and the lowest since 2016. More than twice as many say they are bearish, resulting in a bull-bear spread worse than 98 per cent of readings over the last decade. Extreme levels often indicate market turning points, the AAII recently noting that pessimistic readings have traditionally been followed by higher-than-average six- and 12-month stock returns.
Other sentiment indicators confirm elevated levels of pessimism. Sentix data shows sentiment is at levels that have been reliably followed by recoveries over the last two years, while CNN’s Fear and Greed Index – a composite tool tracking seven indicators – suggests sentiment is in the fear zone. Contrarians will be happy. Sentiment data suggests more fear is baked into market prices than might be assumed. With stocks heading into their seasonally strong period, markets appear poised to rally in the event of better-than-expected news.
Earnings about to take centre stage
Earnings season begins this week and results are likely to be uninspiring. BlackRock notes earnings were initially projected to grow 10 per cent this year; that’s since been whittled down to 2 per cent and analysts are still cutting estimates, Bespoke Investment noting there have been more than twice as many downward revisions as upward revisions over the last month. Third-quarter earnings are expected to slip 4 per cent, which would mark three consecutive quarters of declines – the first time that’s happened since 2015-16’s earnings recession. Still, it’s not all grim. Earnings declines over the last two quarters were very minor and the third quarter will likely be similarly flat. Companies always issue excessively conservative guidance; almost three-quarters of firms have beaten estimates over the last five years, says FactSet, exceeding estimates by almost 5 per cent. Consequently, actual earnings are likely to be flat or to register a minute decline.
Additionally, weakness is concentrated in certain sectors; the median company is projected to raise earnings by 3 per cent, according to David Kostin of Goldman Sachs. Companies have reported surprisingly low effective tax rates in recent quarters, adds Kostin, and a repeat performance could lead to another upside surprise. To repeat, earnings are likely to be uninspiring, but a minor surprise may still be in the offing.