Losses, losses everywhere
Last month, I described why a stock market shakeout was likely. Such episodes are meant to “shake out” remaining weak investors from previously popular stocks, resetting values and creating strong foundations for gains ahead.
Washouts are a different process. They arrive when the markets are overloaded with detritus. Call it junk, trash or ugly leftovers. It’s what remains after fads crash and dreams of riches evaporate. It’s a clean-out of investments that have flunked out.
They’re everywhere
During the 2021 stock market enthusiasm, many of today’s walking dead were alive and kicking. Examine them now and “Yuck!” is an apt description. Yet, still they shuffle on, albeit on life support provided by a diehard fan base.
Why can’t they continue their empty existence? Because the markets will dump them. Without sound fundamentals, trading dries up and out they go. Some will get so cheap, they will be acquired for some business reason – or for a fire sale. Others will drift off to the hinterlands or simply close their doors.
So, which investments are ripe for washout?
The primary groupings are these:
SPACs (Special Purpose Acquisition Companies)
One of Wall Street’s worst creations ever. Sold as safe (You can get your full $10 per back!), the “magic” was that a brilliant person would discover an outstanding company to acquire. With the money in hand, the deal would be made and the SPAC holders would see big gains. However, the big catch was that each SPAC had “sponsors” (a Wall Street label that hid the real descriptor: “free-loading insiders”), and they received a huge 20% of the new deal at minimal cost. Mathematically, using $0 for the sponsors, the SPAC’s investors’ 100% of cash furnished by them shifted to 80% ownership of the new company. Unless the acquisition was made at a price 20% below fair value, that meant the investors’ reality book value just dropped by 20%. Moreover, the “sponsors” were then free to sell their stock at just about any price and still rack up healthy gains (the benefit of “buying” at near-$0). Small wonder the stock charts of the completed deals look so terrible.
Biotech IPOs
These offerings were simply high-risk, venture capital deals that raised money to pay the company’s expenses. Operations were basically scientists working on a glitzy project (the compelling reason to buy in) whose low odds of success made it highly likely to crap out. It’s why virtually all biotech IPOs have 90+% losses – the money’s gone and there’s nothing to show for it.
Story stock IPOs
Like the biotech IPOs, the money raised is venture capital to cover expenses. Likewise, the “story” was some glitzy project. The problem was that it was a long, uncertain way to creation, production, sales, and – most importantly – earnings. Story stocks, without some real, fundamental progress, are destined for the trash heap when the story glitz tarnishes.
So-called Meme stocks
These were the short-lived run-up blasts built on the idea that internet-linked, individual investors could drive up beaten down stocks and cause Wall Street short sellers to pay up in order to cover (buy back) their short positions. Power to the people! Only things didn’t work out as planned, leaving behind a trail of tears and losses for those that still hang on. (When GameStop
Hyped IPOs of former public companies
Having been drained of cash and borrowing capacity to furnish “dividend” payments to the private equity owners, company stocks like Dole and Weber were re-marketed. Prospectuses included beautiful color photos and discussions was how desirable the company products were. Alas, the money raised was going, first, to shore up the company’s depleted finances. Growth was mentioned, but as an unlikely tag-end result.
“Participation” investments
When management wants your money but not your control, it offers less than 50% of stock for sale – or it creates another class of stock with less or no voting rights. But, hey, you get to ride the wave, right? Well, no. For example, BDT Capital, the private equity fund that still owns 85% of Weber stock, just made an offer to buy back the 15% it sold at $14 per share less than 1-1/2 years ago. It’s offer of $8.05 was just accepted by the board (whose responsibility is to look out for shareholder interests, and who holds the most stock?). From The Wall Street Journal article (underlining mine)…
“Weber’s board has already approved the deal, and interim CEO Alan Matula said the transaction provides “immediate and fair value” to the company’s minority shareholders.”
The board chair said the price was fair because the stock market and the company’s fundamentals deteriorated over those fifteen months. Was the forced sale of that 15% block of shares at a 40+% loss legal? Yep. Without a 50+% ownership, those minority shareholders were at the mercy of the majority owners. So, bye-bye to Weber.
Weber stock’s graph from IPO to buyback
Could Dole be next? Maybe…
Dole stock’s graph from its 2021 IPO
The bottom line – Good news awaits after the washout
Like a spring cleaning, a thorough washout cleanses the stock market. Out-of-sight means out-of-mind, and a fresh environment means a fresh outlook. An apropos scene from the movie, “Margin Call,” occurs after many employees are laid off in one day. The head calls together those remaining, saying, (underlining is mine)
“You’re all still here for a reason. 80% of this floor was just sent home, forever. We spent the last hour saying our good-byes. They were good people, and they were good at their jobs – but you were better. Now they’re gone. They’re not to be thought of again. This is your opportunity. You are all survivors. And that is how this firm over 107 years has continued to grow stronger.”
Long live the New York Stock Exchange…
Facade of the famous New York Stock Exchange Building, the largest stock exchange in the world. This … [+]
Source: https://www.forbes.com/sites/johntobey/2022/12/16/here-comes-a-rare-event-a-stock-market-washout/