The IPO Window Lets In a Chill

 | Mar 26, 2014 | 11:55 AM EDT
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Flat one, froth nothing. That's the score right now in this endless series of games between the parts of the market that are cheap and represent value, and the hyped, the overpriced and the over-loved.

Just take a look at King Digital (KING). Here's a profitable company that has mastered the art of mobile gaming but, arguably, is a one-hit wonder. It's a $6.2 billion company with a stock that immediately broke the print price, meaning it dove instantly below where the IPO was priced.

Now some of that is due to the bankers misjudging the market. Some of it is skepticism from the horrendous Zynga (ZNGA) deal, the last time a big gaming play came public. But most of it is common-sense skepticism, people just being simply unwilling to speculate on just anything, even as, in an irony of ironies, this company is actually profitable, as opposed to many of the software-as-a-service cloud plays and developmental biotechs that may never have a product that passes FDA muster. So in that sense, you have to recognize that there is some sweet justice here. Zynga is still too fresh in people's minds.

Too bad that the dot-coms aren't as fresh.

Now I have been adamant that there can't be two markets, a froth market and a stable, flat market. The froth market is made up of marijuana stocks, hydrogen fuel cells, software-as-a-service plays, data analytics businesses and too-young biotechs.

If you believe, as I do, that you can't have a recharging in the big growth tech and biotech names until the IPO market cools, because there's only so much money going around, you have to be heartened by the after-market performance of the cloud, big data and early stage tech IPOs, because almost all of them are now down huge from their highs, and most are very weak today.

That's crucial to my thesis that this IPO window must close, because it is killing the established players as hedge and momentum funds pile out of those and go into these deals.

You need to have more fear in the IPOs, and that's what King has done. That's what the after-market collapse of the last deals have done. You need to have more fear of the hydgrogen plays, which is why Plug Power (PLUG) is selling off, because of an injudicious release from the company that it may win a big order in a couple of weeks. Believe me, that's not how qualified CEOs announce news.

There are many established cloud plays that can't get their footing as sellers continue to dominate the cloud stocks. Today is Workday's (WDAY) day to go through the stock thresher. Concur Technologies (CNQR) is getting whacked again, as is (CRM). There's just too much stock sloshing around from insiders everywhere to make them stabilize, plus portfolio managers are clamoring for low growth at a reasonable price, not ultra-high growth at a very high price.

The Facebook (FB) acquisition of some wacko virtual game helmet for a couple of billion is leaving a lot of people cold too, because it, like King, is a reminder of yesteryear, where anything goes. Now I happen to think that you are betting against Mark Zuckerberg when you bet against this acquisition. That has been a crummy bet since the company figured out digital handhelds when the stock was in the low $20s, but it's been a real good short bet since WhatsApp. Zuckerberg has lost the trust of some of the new shareholder base, all part of the froth-to-flatness conversion.

Meanwhile, the established biotech stocks are attempting to rally, but they are by no means out of the woods, and it looks like Gilead, Biogen Idec and Celgene are ready to resume their swoon.

This collapse is part of a necessary process that leads to the end of the rotation from growth to value. For the longest period, new supply was lacking, mostly because of big stock buybacks and conservatively priced IPOs of real businesses that were snapped up by long-termers. But now the insiders and the IPOs are tipping this market into selloff mode, because there is too much supply. If you close the IPO window, the same sellers will turn buyers.

That makes King the beginning of the end. The end will take a while. There are still red-hot deals such as GrubHub and Box to come. But as skepticism builds about new merchandise, the old growth merchandise will come back in vogue.

Not yet. Not yet.

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