Wall Street investors with access to newly listed stocks at their exclusive IPO prices reaped huge returns in 2020, while retail investors who generally miss out on the best prices still made tidy gains.
Shares of companies that went public via IPOs or direct listings this year on average have surged 75%, with corporations that have yet to report a profit jumping more than twice as much as those with positive bottom lines, according to a Reuters analysis.
It is a stunning result in a year that saw stocks plunge when the COVID-19 pandemic rapidly spread in the spring and communities across the country went into lockdown, then turn around and scale fresh highs. In addition, companies seeking to list shares have been embraced on expectations they will benefit from low interest rates, eventual economic recovery and a rollout of vaccines.
The analysis includes about 200 companies that held IPOs in the United States this year, and a handful of direct listings from companies such as Asana and Palantir Technologies. About 70% of the companies listing their shares this year are not run profitably, according to Refinitiv data and company filings.
Underwriters reserve most of the new shares in red-hot IPOs for top institutional investors, mostly cutting out small investors who can buy shares only once they start trading.
A non-professional investor who bought into all of 2020’s public listings at the closing price of each stock’s first day of trade would be up about 28% for the year, less than half the return of an investor who bought in at each IPO price. That is better than the S&P 500’s 15% gain so far in 2020, but far short of the over 40% gain that buying a Nasdaq index fund at the start of the year would have provided.
Brokerage Citadel Securities has said that retail investors have accounted for as much as 25% of stock market activity in 2020.
(Graphic: Institutional investors win big in 2020 IPOs – https://graphics.reuters.com/USA-STOCKS/IPOS/xegpbbebypq/chart.png)
The large gap between average returns based on IPO prices and returns based on closing prices of the first day of trading underscores the advantages enjoyed by institutional investors on Wall Street.
Airbnb, 2020’s most hotly anticipated stock market debutant, is up 121% from the IPO price in its Dec. 10 listing. But based on Airbnb’s closing price on its first day on the market, the stock is up just 4%.
(Graphic: Institutional investors dominate in 2020 IPOs – https://graphics.reuters.com/USA-STOCKS/IPOS/xklpyjlmzvg/chart.png)
The median IPO return, which reduces the influence of the most extreme winners and losers, so far in 2020 is 51%, shrinking to a more modest 13% based on closing prices after the first trading days.
Chinese online retailer Wunong Net Technology was this year’s strongest-performing U.S. IPO stock, up almost 700% since its listing on Dec. 15, according to Refinitiv data. Investors buying Wunong Net at the close of its first trading day would be up about 230%.
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