Trading IPOs
So why do we track IPOs? Because the chance of mispricing is very large for a new security. Prices are set by flows, not by fundamentals. Pension funds are still waiting for their favorite banker to tell them what the shares are worth.
In hot stocks, animal spirits are taking over, driving stocks to irrational levels. When there is a mispricing in the market, there is an opportunity.
Our monitors track busted IPOs: those down from the IPO price. We find this pool of unloved IPOs to be a fertile hunting ground for long positions. IPOs with a vintage in 202 or 2021 stand out.
Many companies opportunistically IPO’d in 2020/21 before being fully ready. They did not have the profitability, management team, or systems in place to be uccessful, but the valuations were too attractive to pass up.
Most of those companies trade at significantly lower valuations today, while some are finally reaching a more stable level of profitability.
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Kliff Note of the Week
Buyback Notes: KEDM favorite Butler National (BUKS) keeps popping up regularly. This is mostly due to recurring open-market purchases by insiders (with lots of activity over the past few weeks), but more recently, as the company increased its buyback by $10m to ~$12m.
While not huge (~4% of the current market cap), Butler has been buying back shares aggressively over the past year+. Meanwhile, growth keeps accelerating, with the latest quarter up a whopping +50% YoY.
The shares have risen since our last flag, but the multiple has contracted to ~7x LTM EV/EBITDA. Still no coverage.
CEO Turnover Notes: Stryker’s (SYK) Kevin Lobo is stepping down as CEO and will be replaced by Spencer Styles, currently COO. This succession was long expected, but Kevin was a rockstar CEO and under his leadership, SYK outperformed every major competitor by a few ppt per year.
They are difficult shoes to fill. Remember that SYK is down to 16x 2027 P/E, cheap for an HSD defensive growth story, largely due to temporary problems such as an Iranian cyberattack.
Newsletter Short Notes: Hunterbrook published an investigation on Lennar (LEN) and its former land-banking subsidiary, Millrose Properties (MRP), claiming that Millrose bought about $200m of Lennar homes over roughly one month and then rented them out, which may have supported Lennar’s reported home deliveries despite weakening demand.
13D and Activist Notes: Blue Duck Capital (10 points for the name) sent a letter to Snap (SNAP) pressuring them to raise money by selling a stake in its new Specs AR‑glasses unit, calling Snap ‘profoundly undervalued’ with >100% rerating potential.
Selling 20% of Specs could raise $1bn and fund spending for a few years. A reminder that Irenic has also been pushing Snap to spin or shut down Specs. Pressure is increasing…
Strategic Alternatives Notes: In the category ‘could become a cheap lottery ticket’, La Française de l’énergie (FDE) is a messy situation, as gas over‑hedging created much bigger losses than expected.
Realized losses hit ~€8m, with another €26m sitting as m2m exposure – so quite large on roughly €30m in revenues. The operating assets are actually fine here (mine gas is growing and the big Romerike project is profitable), but liquidity is now the big issue.
FDE is of course cutting back expenses and selling non‑core assets. IF they can sort out the financing issue, this one has quite some torque on the equity. We’ll keep an eye on the developments.
Disclaimer. KEDM is provided for informative purposes only. No due diligence has (yet) been performed on the names on this list. The list might change strongly on a regular basis. This overview does not constitute advice; always do your own due diligence. For the full disclaimer, please go here.