Farmers Edge Inc., which gathers data from thousands of farms in Canada and worldwide, has plummeted 80 per cent, while the TSX is up 15 per cent since the company went public.David Stobbe/The Globe and Mail
A deluge of initial public offerings delivered more than $400-million in underwriting fees to Bay Street this year, but the experience has been much less exhilarating for investors. Most of the deals have proved to be duds.
In total, 40 Canadian companies went public this year and raised $9.2-billion, the most since at least 1997, according to market strategists at Bank of Nova Scotia. Of these, 30 deals were for companies that raised at least $50-million, which generally get the most attention, and underwriting fees from these deals totalled at least $406-million, according to a Globe and Mail analysis.
As of Christmas Eve, the average return for this group was only 0.7 per cent, while the equivalent return for the S&P/TSX Composite Index, adjusting for when each company was listed, was 8.1 per cent.
Canadian IPOs, then, trailed the broad market by 7.4 percentage points, which means investors would have been much better off buying a low-cost exchange-traded fund that tracked the Toronto Stock Exchange.
Returns were particularly dismal for technology IPOs, which made up half of the deal flow this year. Tech deals averaged a negative return of 5.2 per cent, while their equivalent TSX return was 7.7 per cent – marking a tech underperformance of 12.9 percentage points.
Some IPOs were unequivocally winners for their investors. Shares of Magnet Forensics Inc. , a cybersecurity company based in Waterloo, Ont., are up 91 per cent since listing, and shares of Neighbourly Pharmacy Inc. , a national operator of pharmacies, have jumped 124 per cent.
Definity Financial Corp. , the year’s largest IPO with a $1.6-billion deal size, has also watched its stock jump 34 per cent – however, the company listed in late November so it is still too early to assess the long-term performance.
Record global IPO binge in 2021 leaves investors hung over
The majority of deals had a different experience. Seventeen of the IPOs worth $50-million or more trail their equivalent TSX return – and a number have truly suffered. Kits Eyecare Ltd. has lost 70 per cent since it listed, compared with an 18-per-cent TSX gain, and Farmers Edge Inc. has plummeted 80 per cent, while the TSX is up 15 per cent since the company went public.
“We believe enough investors may have been burnt by a large-enough degree that the IPO window may close in the coming months,” the Scotiabank analysts wrote in a note to clients.
Many of the poor IPO performers had early returns that were impressive during their first few weeks or months of trading. However, investors would start dumping the stock after a few months, and once that started, a downward spiral would ensue.
There has also been a sharp sell-off in growth stocks at the tail end of the year, sending share prices for scores of high-flying companies crashing back to Earth.
Early in the pandemic, Cathie Wood was thought of as a money-management rock star because her Ark Innovation ETF, which largely bets on software and technology companies, delivered phenomenal returns over the previous three years. The fund is currently down 21 per cent in 2021 – and much of that sell-off has come in the past six weeks. Since January, Ms. Wood’s flagship fund has underperformed the S&P 500 by 49 percentage points.
Inflation fears have played an important role in the recent growth-stock sell-off. Central banks have realized that the recent rise in consumer prices may not be transitory, so they started hinting that they will begin hiking interest rates earlier than expected. Growth stocks often struggle when rates rise.
Market valuations have also been extremely frothy for much of the tech sector throughout the pandemic, so when investors started cashing in profits, the drop was precipitous. Lightspeed Commerce Inc. , which went public in 2019 and had been one of Canada’s recent tech stars, is down 39 per cent this year, while Montreal-based payments company Nuvei Corp. , which went public in 2020, is down 53 per cent from its record high set in September. Both companies have been targeted by a short-seller.
Tech-sector IPOs have been particularly vulnerable to a correction because many of these companies do not generate profits. In fact, most lose lots of money. Until recently, investors were often happy to overlook this because it seemed as though a new class of software-driven companies would benefit from a digital-driven economy.
Public investors had also been more willing to adopt a venture-capital mentality, whereby they were willing to accept early losses in exchange for outsized future profits. But the expected profits are taking too long to materialize, and some investors are starting to give up.
As public investors pivot, they are throwing their money behind more stable, and traditional, companies – which helps to explain why Definity’s shares have jumped so quickly. (Definity is the new name for Economical Mutual Insurance Co., now that the insurer is a public company.)
A number of market strategists expect yield stocks to have the most momentum in the new year.
“Dividends (now classified in a passé group along with ‘Your Father’s Oldsmobile’) will return to prominence,” Ian de Verteuil, a market strategist at CIBC World Markets, wrote in a recent note to clients.
Such a shift should benefit the TSX.
“Valuations across technology stocks tend to be quite sensitive to rising interest rates,” he wrote, adding that Canada’s relatively small exposure to tech, despite the recent IPOs, should be a boon in 2022.
“Even with the success of Shopify , the limited weight of the sector relative to the S&P 500 (11 per cent versus 29 per cent) should help the Canadian market outperform its southern peer.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Tim Kiladze