The last few months have been slow in the IPO world. Not counting SPACs, there have been only five offerings so far this month, following four in May. The IPO market is generally seen as a pretty good indicator of the market mood overall, so the lack of them could be seen as worrying. The private equity firms and their highly paid advisors in the investment banking world are, of course, always keen to take a company public, the former to cash out their investment, the latter to earn the fees that accompany a launch, so delaying an IPO is not a decision that is taken lightly. And yet over the same two month period that has seen nine offerings, there have been the same number of filings withdrawn as stocks that have begun trading.
The fact that there are three IPOs happening today should, in theory, be a good sign for the stock market. However, if you think about the motivation of the companies selling their shares and, more importantly of the investors in those companies, it is anything but. They are looking to maximize their return, so while they want to sell into a buoyant market when there is an appetite for risk, they are also looking to make hay while the sun shines, so to speak, and get in front of any downturn that they may foresee. These are not massive companies, the combined total of the three IPOs at the offering price is under $1 billion, and there will have been a push to get in under the wire before the end of the first half of the year.
If you are familiar with my previous pieces on the subject of IPOs, you will know that I have observed a pattern in the past that has proven to be remarkably consistent when it comes to high-profile offerings. Typically, the hype around them creates excess demand, meaning that when trading starts, it is at a price significantly higher than that paid by those who bought shares in the initial offering. Then those who did get shares at the offering price start taking at least a partial profit and the stock drops back. It is what I predicted would happen with the restaurant chain Cava (CAVA) a couple of weeks ago, and it panned out there. The initial offering price of that stock was $22 and it opened trading at nearly double that, then climbed to just under $48 before sliding around 25% on the second day.
In this case, I didn’t see that predicted slide as a buying opportunity for CAVA which the chart above says it probably was. I guess I got that wrong, but I stick to my original view that short-term post IPO volatility aside, the smart casual restaurant space is far too trendy and too volatile to be the kind of long-term investment for me. Yes, CAVA could be the next Chipotle, but it could also be the next Zoe’s Kitchen, the once trendy Mediterranean chain that Cava bought a while back. That name is no more after all the stores were converted to Cava outlets, something that would have been hard to foresee when Zoe’s was all the rage a decade or so ago.
Among today’s IPOs, though, there is one where I will be looking for that pattern to repeat and will actually pick up some shares for long-term holding if it does.
Savers Value Village, Inc. (SVV) is the largest owner and operator of thrift stores in North America with around 300 stores if you include those in Australia, where they are known simply as “Savers.” They are a retailer of second-hand goods, mostly clothing, but they are not charity stores. They do collect donations on behalf of some charities, then they purchase those things from the charity concerned. That works for the non-profit, giving them revenue immediately without real estate and other costs, but it also works for SVV, who sell those donated things for profit.
Thrift stores are nothing new, of course, but the public attitude to them has changed somewhat over the years. They are still seen as value stores and thus will probably prove quite resilient if we do get a recession, but there is another factor at play, too. Picking up some cool vintage clothing or something by a well-known or emerging designer at one is seen much more as “savvy” than “cheap,” and there are a lot of young people, my daughter and her friend group among them, who buy almost exclusively from thrift stores. They seem to be addicted to the thrill of the hunt as much as the savings, making it a shopping habit that they probably won’t break even when they are no longer students and have more disposable income.
I learned a while ago that in investing, it always pays to pay attention to what your kids are doing. They are the trendsetters, and when the trend they are setting has the possibility of being more than just trendy, we should all take notice. That certainly applies to SVV so, should it follow what I call the “pop and drop” pattern of most IPOs, I will be looking to start accumulating the stock on that drop.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
