Alibaba Group Holding Ltd. was the whale of IPOs in 2014. But there were an awful lot of other fish in the sea.
The IPO of Chinese e-commerce company Alibaba, at $25-billion (U.S.), was the biggest in U.S. history, representing at least a quarter of the total IPO volume on U.S. exchanges last year. But there were more than 200 other companies that went public in the U.S. last year, offering investors more new issues than in any year since 2000, the final year of the great tech bubble.
The results, however, underwhelmed: More than half the issues underperformed the Standard & Poor's 500, not only from their first-day closing price, but also from their offering price. It was the worst U.S. IPO performance in the three years since we began to benchmark IPOs versus a major stock index.
In Canada, a handful of companies tried their hands at the public markets, and the results were even worse. With energy and resources making up five of the nine IPOs on major Canadian exchanges, the late-year collapse in oil prices also led to a hollowing-out of IPO share performance. Just two of the nine IPOs managed to beat the S&P/TSX composite from both their offering price and their first-day close.
We use data from Bloomberg to prepare our annual IPO review. We exclude stocks that began trading on smaller exchanges, such as the TSX Venture, as well as investment funds and partnerships that are selling units rather than shares. Other IPO analyses may use different criteria, so their numbers may differ.
Frequently, much of an IPO's gain comes from the first-day "pop" from its offering price, a price available mostly to institutions and wealthy brokerage clients and not typically to the general public.
To evaluate IPOs, then, we look at returns both from the frequently unobtainable offering price, as well as from the first-day closing price, which reflects the first-day market action. We then compare them to the performance of the major U.S. and Canadian indexes to see whether investors would have been better off just buying a passive mutual fund instead.
In 2013, IPOs were a good deal: More than half of the 200-plus U.S. IPOs beat the S&P 500 not only from their offering price, but also from their first-day close. There were 85 that outperformed the index by 10 percentage points or more.
Not so in 2014. Of 265 U.S. IPOs in our Bloomberg data set, 157, or nearly 60 per cent, underperformed from their first-day close. There were 135 IPOs, or more than half, that underperformed the index even from their offering prices, an easier hurdle to overcome.
Historical data suggest 2013 may have been an outlier, with 2014 representing a more normal data pattern. Jay Ritter, a professor at the University of Florida who has compiled decades of data on IPOs, notes that, even in the S&P 500 itself, a small number of stocks with outsized returns brings up the average, while a majority of companies in the index actually fails to return what the index does. With IPOs, the pattern is "even more extreme," he says.
And, indeed, there were some high-fliers. Nine IPOs beat the S&P 500 by more than 100 percentage points from their first-day close. Seven of those were biotech stocks, making it the "big story" of 2014 IPOs.
By Dr. Ritter's count, there were U.S. 74 biotech IPOs in 2014, easily the biggest number in history. Combined with 41 in 2013, there have been nearly as many biotech IPOs in the past two years as in the previous nine years combined.
"Everybody knows the vast majority of biotech stocks are not going to be successful in the long run, that the odds are against coming up with a great new drug," Dr. Ritter says. "These are money-burning companies that are going to need additional external financing in the future, and the vast majority of them are going to crash and burn. Some are going to do it quickly, while others might take a while. But people are hoping that every once in a while you get an Amgen or Genentech that does become fabulously successful."
Francis Gaskins, an IPO specialist and research director at Equities.com, says that the biotech IPOs are "hard to judge and hard to value."
He points to NeuroDerm Ltd., a company that went public in November and, as of Monday, was trading at nearly 40 per cent below its offering price. Then it announced positive results from a study on its proposed drug for Parkinson's disease, and the shares tripled. And then, they've lost nearly 40 per cent since Tuesday's high.
Canadian investors have mostly been spared such wild volatility, but the ride on 2014's biggest IPO, PrairieSky Royalty Ltd., has been unpleasant nonetheless. Encana Corp. spun off the company in May in a stock sale at $28 (Canadian) a share; it jumped to close at $37 on its first day of trading.
For the next couple of months, even investors who bought that first day profited, as the shares traded as high as $42.60 in late July. Caught in the downdraft of oil, however, PrairieSky closed Friday at $30.40, close to its original offering price.
The top Canadian IPO of 2014 is Kinaxis Corp., an Ottawa-based cloud-computing company that has gained 42 per cent from its offering price (and also from its first-day close, which was flat). With the TSX composite down slightly from the company's June IPO date, Kinaxis has outperformed the benchmark by 44 percentage points.
Globe app users click here for a chart showing the IPO class of 2014
David Milstead