The IPO market, once left for dead, is now back! As of last
month, we've seen the most IPO activity since 2007 when
33 companies went public. Year-to-date, the number of IPOs
stands at 190, well ahead of this time last year. Let's focus
on the 100% IPO gainers or as we call them the "100%
Recent IPOs, including the Container Store (
), have jumped over 100%, as well as Noodles & Company
(NASDAQGS:NDLS), which also traded over 100% higher the day of its
IPO debut in July. Potbelly (NASDAQGS:PBPB) was yet another
recent IPO 100%+ gainer.
) gained around 80% in its IPO launch today. Will the
froth stick or wear off?
Recent Specialty Retail IPO Valuations
Of course the justification of such one day pops is
that the companies' earnings will grow into these lofty valuations.
But with Noodles & Co.'s current EBITDA of just over
$30.1MM on a share price that places the company's value at $1.3B
(36x EBITDA), the company will need to grow earnings astronomically
just to maintain current price levels. (To put this in
perspective, Noodles & Co's EBITDA hasn't really grown much
since 2010 when its EBITDA was $26.5MM). Needless to say
there is a lot of room for downside surprise if these growth
expectations are not met.
The Container Store is in a little better shape. With
$87.6MM EBITDA TCS's multiple sits near a more manageable 20x
EBITDA, but the company also holds a sizeable debt load and has
seen its same store sales growth slow significantly as of late.
However, as we discussed on Valentine's Day in our article, "
What do Earnings and Icarus Have in Common
?" the market (NYSEARCA:VTI) has completely forgotten about
earnings during the momentum meltup of the past few years anyways,
so it is no surprise that these IPO investors are also throwing
earnings to the wind as well.
As more and more IPOs come to market at valuations significantly
higher than their market peers, one can't help but also wonder if
this is just another sign the stock market has gotten too hot for
its own good.
Specialty Grocers also Popped 100%
But, it doesn't end there as the grocery sector also remains on
fire as it too has not been spared the IPO (NYSEARCA:FPX) hype
When Sprouts Farmers Market (NASDAQGS:SFM) went public in
August, the organic and health food concept was able to attract
enough money to shoot its stock up 100% by the opening of trading,
closing 121% higher to $39.86.
Sprouts' story is like so many other IPOs, it all depends on the
future growth of its stores, and its valuations show it with a P/E
currently in the triple digits.
Other Specialty Grocers include Whole Foods (NASDAQGS:WFC), The
Fresh Market (NASDAQGS:TFM), and Natural Grocers (
). While Whole Foods has been public for over 20 years, Fresh
Market and Natural Grocers also had more recent IPOs.
On 11/5/2010 Fresh Market got a hefty first day pop of 46% above
its IPO price. Two years later its stock is now up over 130%
from its IPO price of $22 while it still sports a P/E of 36x
earnings, and its Cash Flow has actually been declining the last
Natural Grocer's IPO on 7/25/12 also saw a pop of 20% on its
debut and has since risen another 100% nearing $40 and also still
sporting a P/E near 100x.
Taking a step back fundamentally, the grocer market as a whole
can really only grow at the rate of the population (a few % per
year). This means in order to meet these growth rates, all
these new entrants must eventually steal major market share from
the majors such as Safeway (
), Kroger (
), Wal-Mart (
), and a plethora of other public and private grocers.
Meanwhile, most of these majors have also started offering their
own specialty food sections in an attempt to compete with all the
Let's Go to the Tape
Having said all this, for most investors all that should matter
is price, and right now price is in an uptrend so longs should stay
long, at least for now.
A look at the chart below shows that the trend has certainly
been a friend to the specialty grocers and in particular Whole
Foods & the ETFs that hold some of these Specialty
Grocers. But, caution should now reign supreme as recent
price highs are being accompanied by something that hasn't occurred
since the last major top in Whole Foods and the markets.
Whole Foods made a new high in 2004 around $24, but then after a
pullback went on to make another new high at the end of 2005.
However, that new price high was not accompanied by as much
momentum, signaling the end of the trend and shown in the bottom
portion of the chart.
A similar setup today exists in Whole Food's chart. In
2012 Whole Foods made a new all time high nearing $50, and then it
pulled back into 2013. Since then it has also made a
subsequent new high, but this time as well it is thus far
accompanied by less momentum.
If price falls through the trendline that captures all of Whole
Foods gains since the 2009 price low, it will be a sign that once
again a new high accompanied by less interest is warning of a
significant top in price.
The First Trust Consumer Staples ETF (NYSEARCA:FXG) holds
companies such as Whole Foods & Sprouts in its portfolio.
Whole Foods actually is its largest holding at 6.8% and is another
way to play the Specialty Grocer sector.
FXG is also shown in the chart as it displays similar
characteristics to Whole Foods. A breakdown in the high flying
specialty grocer stocks, such as Whole Foods, would be a sign that
FXG's run is also likely over.
Another ETF offering Specialty Grocers is (NYSEARCA:PMR) which
includes Sprouts and Fresh Market in its holdings.
On 9/24 we made a similar observation with financial stocks in
our article, "
Rough Road Ahead?"
when financial stocks were similarly close to breaking down from
their long term trend. Since then the Financials Select
Sector SPDR (NYSEARCA:XLF) has underperformed the S&P
(NYSEARCA:SPY) for the first time since the March market top as
investors continue to shift out of financials for other
A similar breakdown in Whole Food's trend may signal a similar
fate of its underperformance going forward.
Profit Strategy Newsletter
uses technical, fundamental, sentiment, and common sense tools to
keep investors on the right side of the markets. Right now
the specialty retail trend is up, but similar to what happened in
2006 as well as more recently to financial stocks, a break in trend
would be a bad omen for the 100% club.
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