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King Digital prices at $22.50, trades as low as $18.90 and closes at $19.00 in its NYSE debut. It broke. Badly.
I told you in my Trader Talk yesterday that the IPO market was holding up well--until yesterday. First-day IPO pop for the 55 IPOs that have gone public this year was up a healthy 22 percent; the after-market pop (the percentage the average IPO has been up since its IPO) was also a solid 29 percent.
Until today. There are several recent IPOs that are showing signs of weakness. A10 Networks (ATEN), which optimizes data center performance, went public last week at $15 and is now trading below its IPO price, at $14.55.
Many other companies that went public last week: Paylocity (PCTY), MediWound (MDWD), Amber Road (AMBR) and Q2 Holdings (QTWO) are trading below their first-day pop. They're still above their initial price, but the IPO after-market premium is shrinking fast.
But the failure of KING (OK, it's not a failure, but it's a big disappointment) is sending a ripple through the IPO community. There's not fear yet, but there is concern.
What you want to look for are two things: Cancellations and repricings. Not seeing cancellations yet, but there is much higher risk of repricings.
There are three IPOs pricing tonight, representing a good cross-section of the IPO market:
If any of them postpone, or any prices below the price talk, that would cause greater concern.
There's an additional five more tomorrow night, including CBS Outdoors and Everyday Health.
By the way, in my opinion, it would be healthy for a small deflation in the IPO market. Not a full-on meltdown, that would only happen if the overall market collapsed. But a gentle de-escalation would be welcome.
-By CNBC's Bob Pisani
Is the IPO market in a bubble? What an obsession this has become in the last few days! On the surface, the IPO business is terrific: There have been 53 IPOs so far this year that have raised about $8.5 billion, far more than last year. There are also dozens of companies slated to go public in the next couple months.
But is the market in a bubble? There are a couple ways to look at the strength of the IPO market:
First: Opening-day pop. The average rise on the first day between the offering price and the closing price for IPOs this year has been 22 percent, according to Renaissance Capital. That is well above the historic average of a 13 to 15 percent gain. During the internet bubble, for example (1999-2000), the average return on the first day was over 50 percent.
Conclusion: Still healthy.
Second: Post-IPO return. This is arguably a more important metric. For the companies that have gone public this year, from the IPO price until the close yesterday there have been an average gain of 29 percent.
That's good, but that figure has been dropping in the last few days. That's important, because that number is very carefully watched by the IPO community. Why? Because people who are pricing IPOs now and in the near future watch that number, and when the number is dropping they will become more cautious on pricing their IPOs.
It makes sense: if prices for recent IPOs are dropping, investors in IPOs in the near-future will be more cautious.
Conclusion: Not alarming yet, but bears watching.
Third: How a basket of IPOs track against the S&P 500. There's an ETF for that: As of yesterday, the Renaissance ETF (IPO), a basket of recent IPOs, is up 2.8 percent for the year, versus an 0.5 percent gain for the S&P 500. However, that gap is narrowing in the last few days.
Why is the gap narrowing? Investors are worried about the froth, but they are also worried about the economy. I have said this many times: the health of the IPO market depends on the health of the economy and the stock market. These companies trade on perceptions of future revenue growth. If there is concern about the economy--or they think valuations have gotten too far ahead of themselves---IPO investors will look for a repricing.
Conclusion: Not alarming yet, but trend is worrisome.
Here's what to watch for in the coming weeks:
First, IPOs getting pulled. There are not many signs yet. However, last week Globoforce (THNX), a cloud platform that did employee rewards, was pulled.
Second, repricings. This is my main bellweather. Watch for repricings--I mean stuff that starts to price below the expected ranges.
That will be the first sign investors are starting to get more conservative. Pay particular attention to the economy, because we should be seeing signs that the economy is doing better after a miserable winter.
These IPOs are, for the most part, growth companies.
If the economy does not grow as fast as anticipated, growth companies will see a pullback in their IPOs.
This is particularly true of "cloud computing"-type companies that for the most part make no profits.
Third, watch the recent IPO after market. Another good barometer. How is stuff trading that just went public?
I see some concerns here. Look at A10 Networks (ATEN), which helps improve data centers, priced at $15 on Monday, went to $16.50 on its first day, but is now at $15 and looks like it might break.
Look at Castlight Health (CSLT), which helps companies with healthcare solutions. Went public less than two weeks ago, had a 148 percent pop on its first day of trading and was over $40, is now at $24, still above its IPO price of $16 but down every day since it began trading.
A bit worrisome.
Bottom line: We are at a very important juncture in the IPO market. Recent IPO pricings must stabilize and economic news needs to keep improving.
A lot of IPOs are depending on it.
The initial public offering (IPO) rush is generating lots of sarcasm. When online storage company Box announced that they had filed for an IPO last night, it was immediately noted that the company had a $168.6 million loss for the fiscal year ending in January. That's not far from the $250 million the company is seeking to raise in its IPO.
Much of the loss was due to the cost of acquiring new customers, and of course most companies are not profitable when they first go public.
Lightening up on market leaders and Big Mo. Stocks that have been market leaders, along with Big Momentum names (those that are heavily traded for their growth characteristics) are weak today.
Market leaders down notably today, including ETFs:
The initial public offering (IPO) rush is gathering steam.
While Candy Crush game maker King Digital (KING) is getting all the press, there are several others of great interest. In all, the market will absorb 11 different IPOs this week.
KING is seeking to raise 22.2 million shares in a range of $21—$24. Even at $24, that totals $532 million, a very small part of the estimated $7.2 billion market capitalization, and about 7 percent of the company.
Stocks are weaker going into the final two hours of trading...there is a sell-side imbalance in stock for sale at the close. There is also a quarterly rebalancing of the S&P 500 at the close, with some modest stock for sale with IBM (IBM), Cisco (CSCO), Express Scripts (ESRX), Illinois Tool Works (ITW), and Apple (AAPL), all of which are having their weightings reduced in the S&P 500 due to buybacks.
The Dallas Fed's Richard Fisher was also speaking midday, noting he had no qualms about seeing a little more market volatility.
Indeed, the S&P 500 hit a historic intraday high right after the open.
And all 10 sectors in the S&P 500 are up this week. Financials have had great run, with the KBW Bank Index (BKX) up 4.7 percent, and Technology is up over 2 percent. Even Utilities...an interest-rate sensitive sector...are up on the week.
Even more remarkable is that the markets side stepped a potential land mine in Ukraine...as long as there is no troop movements, the markets have shown little interest, so far.
Bottom line: The most hated rally continues. The S&P 500 is up 1.3 percent for the week to date.
Predictably, it has also ignited a debate about very high drug prices (and high stock prices).
The list price for Sovaldi is $1,000 a day.
I spoke with Ian Somaiya, the biotech analyst at Nomura who covers Gilead. He said the key to understanding this was to compare the cost of Hepatitis C therapy before Sovaldi and after.
He noted that the average price point for a full course of treatment using traditional drugs is $70,000 over a period of 24 to 48 weeks. The cure rate was around 55 percent.
Fast forward to Sovaldi and Sovaldi-based combinations. The price point is $90,000 to $100,000.
But the cure rate is at least 90 percent, and could be closer to 100 percent.
And the course of treatment is only eight to 12 weeks.
The older drug treatment, which uses interferon, causes severe flu-like symptoms, while another drug also used, ribavarin, causes anemia. And you still only have a 55 percent cure rate.
"That is what Representative Waxman needs to consider, the dramatic improvement in cure rates going from 55 percent to 95 percent on average, as well as the avoidance of all the debilitating side effects these other drugs cause," Somaiya said.
But what about that high price? This highlights a very interesting fact about drug pricing: In the U.S., there is no legislation that allows Medicare or Medicaid to negotiate price. The companies set the price and the discussion revolves around the rebates or discounts the company will provide.
You can negotiate price in Europe. European governments do negotiate prices for drugs. In Europe, the prices are 25 to 50 percent less. That is certainly good news for consumers, but there are certain drugs that are not available in Europe because the companies don't want to sell them.
That is a public policy question, but for the moment it seems clear that negotiating higher discounts would be a priority for the U.S. government.
I am sure Gilead will have reams of data to present to Rep. Waxman.
Financials and old-school techs are back in favor this week. The higher rates we have seen could be a help to banks:
But watching old school techs move up this week has been interesting:
I noted yesterday that old school tech was more "growthy," so they get a higher multiple in a rising rate environment, which is usually equated with growth.
(Read more: 'Old school' tech stocks rally: What's up?)
It has also been a huge weak for the semis...the Semiconductor Index up 4.5 percent and has broke to its highest level since 2002.
It was tough trading day in Asia, with virtually all major exchanges in the red: Indonesia down 2.5 percent, Hong Kong down 1.8 percent (its lowest level since July), Japan down 1.7 percent, Shanghai down 1.4 percent, and Korea down 0.9 percent.
Little wonder. After yesterday's press conference by freshly minted Federal Reserve chief Janet Yellen, traders—particularly those in emerging markets —left with three takeaways. These are: the dollar will get stronger, interest rates will rise, and less accomodative monetary policies are coming.
We are seeing a continuation of a two-day rally in financials today, and it is fairly broad, including most of the regional banks.
Banks this week:
That's not what is interesting me, though. we are getting a vicious rotation into "old school" tech names this week.
Techs this week:
And there are many others. Banks rising make some sense on higher interest rates, though a flattening of the yield curve (which is what we have seen in the last two days) is not usually a positive for banks.
But why a tech rally? There are several likely explanations:
First: Techs are not as levered and more "growthy," so they get a higher multiple in a rising-rate environment, which is usually equated with growth.
Second: Many of the super-growth tech names may have maxed out for the moment (Workday, Fireye, Tableau Software, etc.), so it's time to rotate into "old school" names; this may also be true of other "super-growth" sectors, like biotech and defensive groups like healthcare. The biotech ETF (XBI) is down again today.
Third: It may not be an accident that the two groups moving the most are the two groups with the heaviest ranking in the S&P 500. Much trading is now driven by indexes and index futures, and specifically by ETFs like the SPDR S&P 500 (SPY), which routinely trades north of 125 million shares a day.
Finally, we are seeing the usual, knee-jerk reaction in interest-rate sensitive stocks like REITs, which have had a decent run this year...until yesterday.
REITs this week:
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