There are many advantages to trading stocks versus futures, with some of the best trading opportunities found in newly created IPOs.  One advantage of trading stocks is the sheer number of products available with thousands of individual stocks to choose from, compared to a handful of indexes on futures markets.  Even on days when the overall market is quiet, many individual stocks have an actionable trading range due to company or sector news.

There are fewer stocks in the market since the M&A boom and the dot-com busts that occurred between 1995 and 2003, with the number of listed stocks falling by close to 50% during that time period.   The market has stabilized with about 4100 – 4400 listed stocks since 2003.  Check out our post on “How Long Can the Market Sustain its Low Volatility?” for more information on this and other factors affecting the low volatility of the market.

The biggest change in listed companies has been the average market cap, which has nearly doubled since 2008.  According to a study earlier this year out of Harvard, the average market cap of a US listed company is $7.3 billion, with a median of $832 million.  Approximately 140 companies now make up about 50% of the total market capitalization.  These larger, more stable companies are generally not the domain of traders.

Number of IPOs Increasing for 2017

Newly created stocks from Initial Public Offerings (IPOs) often times present the best trading opportunities as the market moves around trying to settle on the correct pricing for the new issue.  IPOs in the US are down from their peak in the 90’s, following a similar trend as stocks.  IPO issuance peaked at 677 in 1996 with large numbers of companies going public into the dot-com boom, only to succumb to the bust or be bought out later.  Hitting an all-time low during the Great Recession in 2008 of just 35, IPOs rebounded to hit 291 in 2014 with record capital raised of $96 billion.

The last couple of years, however, have been down years for IPOs, with only 112 completed deals in 2016 raising just $21b.  2017 is showing improvement so far, with 91 completed IPOs in the first half of the year.  Better, but for a market that has been in rally mode since early 2016 (save for the hiccup around the election in November), this uptick is not very robust.  This leaves stock traders with fewer choices in the aisles of Nasdaq and NYSE.

Opportunity Still Exists with IPOs

The upswing in the number of IPOs creates opportunities for traders, but it can still be tricky to earn decent returns in the current environment.  IPOs can be risky business for an individual investor as it can be difficult to predict how new stock will perform when introduced and trading begins.   Most IPOs are experiencing a transition period which makes their future value a bit uncertain and there is no historical data for comparison.

The first half of 2017 saw returns on IPOs averaging just 10.6%, the 2nd worst performance for a 6-month period since 1995.  Why the decreased performance?  The change in the structure of today’s typical IPO has had a profound effect on returns.  It takes traders with experience and a good understanding of the market to recognize the returns of yesteryear with IPOs, but opportunities do still exist.

Change in Structure of Today’s IPO

The profile of today’s IPOs has changed dramatically in the last few years, with companies waiting until they are much larger to go public than companies in the past.  The median deal size has jumped from $82 million in Q1 2016 to $190 million in Q2 2017.   IPOs are raising more money than ever before, and are fundamentally more stable even from the beginning of their public offering.

When these companies choose to go public, they are a stable company with distinct revenue streams and fully functioning management teams.   This stability allows them to command a higher market cap than companies without a proven track record.   With more visibility on valuation, there is less volatility and less chance for bigger returns for traders.

IPO Comeback Slow and Steady

While the IPO market appears to be improving this year, headwinds still exist that will keep it from accelerating too rapidly.  Management and owners must be prepared to give up some control to shareholders.  This may deter some companies from transitioning to a public company until they really need the capital for growth.

For private companies hesitant to jump into an IPO, venture capital and private equity markets have matured to fill the gap. Companies choosing to stay private longer can do so with low interest rates for debt financing providing an attractive option for growth.   The Private Equity space also received additional boosts with the crowdfunding and Reg A rules that have gone into effect the past couple years, making it easier to raise capital without taking the step of a public IPO.  Add to that the additional regulations imposed on public companies by the Sarbanes-Oxley Act of 2002, and staying private becomes even more attractive.

Special Purpose Acquisition Company (SPAC)

A Special Purpose Acquisition Company, (SPAC), is another opportunity for traders if they are willing to do some research.  There is growing use of this interesting hybrid of public and private funding markets.  An SPAC IPO is essentially a blank check for the managers of the company to go out and purchase private companies.

A SPAC is typically formed by individuals with in-depth business knowledge, usually in a specific industry, and confident that they will identify profitable acquisition opportunities.  100% of money raised through the IPO is deposited into a trust account to fund the SPAC, which gives reassurances to investors. Warrants are generally part of the package as well, giving traders even more options on how to play new entrants.

Great Point Capital is a Leader in Equity Day Trading

Great Point Capital specializes in equities and equity options, offering professional services for active traders including Prop Trading, Index Options Trading, and Quantitative Trading services.   Our team has experience trading in all available pipelines; stocks, futures, IPOs and SPACs, and is one of the few firms with the ability to offer access to Takion trading software.

Great Point Capital is a member of FINRA, serving the trading community since 2001.   Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers. Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.