It’s an IPO showdown.
With office-sharing giant WeWork, teeth-straightening company SmileDirectClub and at-home fitness player Peloton all expected to go public in the coming weeks, some are looking to other 2019 initial public offerings for guidance.
Those include the outsized success of fake-meat maker Beyond Meat, but also the not-so-hot stocks of ride-hailing companies Uber and Lyft, which closed at all-time lows on Tuesday following months of weakening performance.
But Uber and Lyft’s weak performance could make the upcoming offerings much more attractive for individual investors, says Kathleen Smith, chairman and co-founder of Renaissance Capital and the brain behind her firm’s outperforming IPO ETF.
“I think Uber and Lyft’s poor trading is going to be a big advantage to the buy side, investors,” Smith said Wednesday on CNBC’s “ETF Edge.” “All of these companies are going to have to please a pretty nervous set of investors who already got burned in some of these large money-losing IPOs.”
Uber, for one, lost the most money in the 12 months leading up to its IPO than any other IPO ever, Smith said. The second-biggest money loser in IPO history? WeWork, followed by Lyft, she said.
As a result, “it’s hard not to think about Uber when you think about WeWork,” Smith said. “f you look at the performance of those IPOs, they do not do well for investors. It’s going to be incumbent upon WeWork, and for many reasons, to get that valuation low.”
On Thursday, CNBC’s David Faber reported that WeWork’s valuation targets were going to be dramatically lowered from the original $47 billion private valuation, and that the company would hold off on hitting the public market next week.
Even with the risk, however, the Renaissance IPO ETF — a market-cap-weighted fund that currently counts Spotify, Roku and Eli Lilly spin-off Elanco Animal Health in its top holdings — has handily outperformed the market this year, with a 33% rally compared to the S&P 500’s 19% gain.
“The beauty is that even though Uber became a top-10 holding in our product, we’ve had some very strong names” including Roku, the ETF’s second-largest holding at a nearly 8% weighting, Smith said.
“I looked at all other ETFs, and who has the largest holding [in Roku]? It’s our IPO ETF,” Smith said. “The second-largest … is less than 2% of another ETF in the market. So, we are getting exposure for investors to these very new names that are not included or underweighted in many other indices.”
That’s why Smith counts Renaissance’s IPO ETF as the only pure play on newly public companies. A passive fund that holds the largest, most liquid new companies’ stocks for two years, rebalancing quarterly and making an exception for the largest IPOs, it is, to Smith, “the only ETF in the marketplace that has pure exposure” to the IPO space.
And while Uber and Lyft’s recent performances have produced some scary headlines, some see the IPO ETF as a great way to play a fundamentally healthy IPO market.
“It’s absolutely been on fire,” Dave Nadig, managing director of ETF.com, said in the same “ETF Edge” interview. “It really does come [down] to that consistent, accurate valuation. You want IPOs to come out and move a percent or two on the day they come out. We’ve seen some of those, and then people learn those stocks, they run up, they show up in Kathleen’s fund and you get that kind of performance.”
The IPO ETF gained less than 1% in Thursday trading.