SpaceX just IPO'd. The data says sell your other space stocks.
A Journal of Finance study of 134 large IPOs found rivals drop when the big one lists. Virgin Galactic holders, read this.
Happy SpaceX day for all who celebrate. Now the warning.
A lot of people are holding Virgin Galactic, ASTS, and the rest of the space basket expecting everything to rally together. A study from the Journal of Finance (Hsu, Reed, and Rocholl, 2010) looked at 134 large IPOs and nearly 9,000 rival firms and found the opposite. When a big IPO completes, rival companies drop on the day. When the IPO gets withdrawn, rivals rally. The bigger the deal, the bigger the hit.
The Facebook 2012 example tells the story. On IPO day, Facebook itself returned all of 0.6%. LinkedIn, Groupon, Yelp, and Zynga dropped 5 to 10%. People sold the social media names they held to buy the new one. It didn’t even help: Facebook got cut roughly in half over the following month.
This isn’t about business quality. It’s flows. There’s only so much money in the world, so allocating to SpaceX means withdrawing from something, and the something is usually the rival names in the same theme. SpaceX’s float is around $1.75 trillion, it enters MSCI indices on day 2 and the QQQs around day 15. Index funds and space ETFs that need to buy it may have to sell a little of everything else to do it. More downward pressure on the basket.
And the setup is stretched. The day before the IPO, Virgin Galactic ran 23% and the rest of the space names rallied hard. That’s exactly the euphoria the study warns about.
None of this means these companies go to zero. It means if you hold them expecting a group rally, 134 IPOs of data say otherwise.
17.30% max drawdown over 25 years while the S&P drew down 57%. That comes from following flows and data instead of stories. When the systems draw down, members hear about it directly in The Drawdown Memo.
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