I'm frankly appalled by what I'm seeing in the IPO marketplace right now.
A whopping 120 companies have raised just over $35 billion through the first half of the year on U.S. stock exchanges. That puts 2018 on track to be the second-busiest IPO year (besides 2012) since ... drumroll please ... the 2000 peak of the dot-com bubble.
If the companies coming out of the chute were solid ones with long histories of profitable operations and time-tested business models, I wouldn't worry. But the sludge that's running down Wall Street is entirely different.
Take a company called iQIYI (IQ) . It's a Chinese video streaming service majority-owned by Baidu (BIDU) that's been operating since 2010. Unfortunately, in every single one of those eight years, it lost money. That includes $554 million in 2017, $463 million in 2016 and $410 million in 2015.
What about the future? It must look better or the "Netflix (NFLX) of China" wouldn't have been able to go public in a March IPO that raised $2.25 billion, right? Nope! As of June, analysts were forecasting losses to surge to $789 million in 2018 and $723 million in 2019.
Again, let me repeat that for emphasis: eight years of operation … eight years of losses ... and another $1.5-billion-plus in losses likely over the next 2 years (at least).
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Yet for a time, investors piled into IQ shares like the company was spinning straw into gold. The stock soared from its $18 IPO price to more than $46 in mid-June, a gain of 155% in just a few weeks.
Spotify (SPOT) racked up red ink of $268 million in 2015, $629 million in 2016 and a stunning $1.45 billion in 2017. Yet it went public through a direct listing in April that valued the company at around $27 billion.
Those are just the ones you've probably heard of because they get so much digital ink. There are plenty of also-rans and "Me Too" companies slinging their shares, just like two decades ago.
Take HyreCar (HYRE) , whose business model revolves around connecting wannabe Uber and Lyft drivers with people who have idle cars they don't mind renting out to them. It managed to raise $12.6 million last month despite the fact it sported operating losses of $800,000 in 2016 and $4.1 million in 2017.
Or how about DOMO Inc. (DOMO) , the cloud computing company? It raised $193 million in June ... despite losing $176 million in fiscal 2018 and $183 million in 2017.
Then there's Bilibili (BILI) , a Chinese provider of online entertainment including videos, mobile games and anime content. It lost $57 million in 2015, $129 million in 2016, and $34 million in 2017 ... yet still managed to raise $483 million in its March IPO.
Another Chinese tech play, the "used car e-commerce platform" Uxin (UXIN) , followed Bilibili with its own $225 million IPO. That's money it could really use, considering it racked up operating losses of $188.5 million in 2016 and $270 million in 2017.
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Of course, money-losing, traditional tech companies aren't the only wing-and-a-prayer firms with their hands out. Money-losing biotechs have been raising (and burning through!) gobs of money, too.
In a single 24-hour period — June 20-21 — five biotechs priced their IPOs. They raised a total of around $460 million, making it the most active day for biotech deals in U.S. history. Yet not a single one of them was profitable.
That included Avrobio (AVRO) , with full-year 2017 losses of $18.6 million, Aptiny (APTX) , with 2017 losses of $32.1 million, Magenta Therapeutics (MGTA) , with losses of $35.5 million, Kezar Life Sciences (KZR) , with losses of $8.5 million and Xeris Pharmaceuticals (XERS) , with losses of $26.6 million. For good measure, Eidos Therapeutics (EIDX) went public a day earlier. It lost $11.9 million in 2017.
So, what do I think about the tech IPO mania? What do I believe the future holds for many of these companies, the ones gobbling up billions of dollars in capital like Pac-Man on a blue ghost bender?
Well, more than half the dot-com darlings of the late 1990s eventually went up in smoke. Not every one of the companies I just mentioned is destined for the dustbin of history.
But given the gobs and gobs of red ink they're racking up, and the half-baked business models many of them are pursuing, there will be financial carnage. Lots of it. Heck, it may not even take all that long to get started. That's because many of the stocks are already tanking!
Bottom line: When you combine the IPO frenzy with all the other manic market behavior out there, you don't exactly get a happy-go-lucky picture of market stability. Instead, it looks exactly like what you'd expect to see in the final death throes of a deflating "Everything Bubble."
Wall Street analysts and the mainstream financial press want to talk FANG, FANG, FANG (Facebook (FB) , Apple (AAPL) , Netflix (NFLX) , Alphabet (GOOGL) all day long. That's because these "hot" stocks boost their ratings, commissions and fund inflows.
But with the yield curve collapsing … the Federal Reserve raising rates steadily … and signs of credit stress increasing by the day, mark my words: Those ultra-high-risk companies are likely headed straight into a brick wall.
So, the only sensible course of action in my book is to:
- Continue to maintain a much higher cash position than in years past. The model portfolio currently has about 40% in cash, up sharply from our previous fully invested stance.
- Move up the quality scale for any remaining stocks you hold. By that, I mean get rid of higher-risk garbage names like those I just mentioned. Focus instead on higher-rated, higher-yielding, more stable names.
- Hedge against weakness — or target downside profits — using specialized tools like inverse ETFs. The ProShares UltraShort Financials (SKF) and ProShares UltraShort Euro (EUO) are two I've zeroed in on so far, and they're both working out nicely for you.