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July 17, 2021, 10:36 a.m. EDT

This one signal says a stock market correction may be on the way

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By Michael Brush

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First, decent quality companies are coming public. “Because companies stay private longer, you are seeing far more mature companies coming public,” says Todd Skacan, equity capital markets manager at T. Rowe Price. These aren’t like the speculative Internet companies of 1999. “It would be more of a signal of froth if more borderline companies were coming public like in the fourth quarter of 1999,” he says.

We saw some of this with the SPACs, says Skacan, but the SPAC craze has cooled off. Second-quarter SPAC issuance fell 79% compared to the first quarter, muted by “investor fatigue and regulatory scrutiny,” says a Renaissance Capital report on the IPO market. In the second quarter, 63 SPACs raised $12.2 billion, compared to the 298 SPACs that raised $87 billion in the first quarter.

Next, the type of company coming public might also calm fears. Alongside all the tech names, there are many industrial and consumer-facing companies — not the kinds of businesses that indicate froth. The latter category includes public national brands like Mister Car Wash /zigman2/quotes/227485534/composite MCW +1.42% and Krispy Kreme /zigman2/quotes/227704127/composite DNUT +0.45% , and the high-growth oat milk brand Oatly /zigman2/quotes/226726562/composite OTLY +9.22% .

Third, IPOs are only floating 10%-15% of their overall value, and many post-IPO valuations are not that much higher than valuations implied by pre-IPO capital raises. That’s different, compared to 1999. “It is not like they are selling a high number of shares at inflated prices,” says Skacan. This makes sense, because companies that are more mature when they do an IPO don’t need as much money.

Liquidity flood

“I think it says more about general liquidity than it does about where the stock market is going next,” says Kevin Landis of the Firsthand Technology Opportunities  /zigman2/quotes/203635118/realtime TEFQX +4.75% , referring to the IPO frenzy. “There is so much money sloshing around. The capital markets look like the rich guy from out of town who just got off the cruise ship, and we are all coming out of the woodwork to sell him stuff,” he says.

“Things are going up simply because of liquidity, which means eventually there will be a top,” says Landis. “But not necessarily an impending top right around the corner.” Landis is worth listening to because his fund outperforms his technology category by 9.6 percentage points annualized over the five years, according to Morningstar.

The bottom line

Market calls are always a matter of what intelligence spies call “the mosaic.” Each bit of information is a piece of an overall mosaic. While the IPO market froth is disturbing, you should consider this cautionary signal as just one among many.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned APP. Brush has suggested APP in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks,

/zigman2/quotes/227485534/composite
US : U.S.: NYSE
$ 19.28
+0.27 +1.42%
Volume: 981,314
Dec. 7, 2021 4:02p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$5.65 billion
Rev. per Employee
N/A
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/zigman2/quotes/227704127/composite
US : U.S.: Nasdaq
$ 15.80
+0.07 +0.45%
Volume: 1.46M
Dec. 7, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
0.89%
Market Cap
$2.63 billion
Rev. per Employee
N/A
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/zigman2/quotes/226726562/composite
US : U.S.: Nasdaq
$ 8.77
+0.74 +9.22%
Volume: 6.25M
Dec. 7, 2021 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$4.75 billion
Rev. per Employee
$537,397
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/zigman2/quotes/203635118/realtime
US : U.S.: Nasdaq
$ 18.29
+0.83 +4.75%
Volume: 0.00
Dec. 7, 2021
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