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% Club."
Recent IPOs, including the
Container Store Group
), have jumped over 100%, as well as
Noodles & Company
), which also traded over 100% higher the day of its IPO debut in
) was yet another recent IPO 100%+ gainer.
) gained around 80% in its IPO today. Will the froth stick or wear
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 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
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 hype either.
Sprouts Farmers Market
) 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
The Fresh Market
(NGVC). 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 two years.
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
(WMT), 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
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.
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
PowerShares Dynamic Retail
(NYSEARCA:PMR) which includes Sprouts and Fresh Market in its
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
(INDEXSP:.INX) 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.
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.
Editor's note: This story by Chad Karnes originally appeared on
To read more from ETFguide, see:
QEternity or Not, Treasury Yields Still
Commodities Send Deflationary Warnings
Is Now the Time to Buy China?