Sometimes when nothing happens, it can be news.
Today the New York Stock Exchange launched one of the largest initial public offerings of the era, Snap (SNAP) , and it went off without a hitch. Believe me, it could have been dreadful. It could have been like Facebook (FB) , a deal that caused tremendous concern about the entire process of underwritings. It could have been Twitter (TWTR) , which was way too hot too soon. It could have been like Zynga (ZNGA) or Groupon (GRPN) , two deals that spiked then lost people loads of money. Instead, the Snap deal went off without a hitch, causing nary a ripple for the rest of the market.
The stock of the company that has pioneered social picture messaging came public at a pleasant $7 premium to its $17 price on great volume less than two hours after the market opened. It went smoothly, and while you may regard the stock as hopelessly overvalued, it could have played havoc with the entire market, as those other deals did.
Why is this so important? Because I have become used to the idea that often the mechanism of the stock exchanges and the bankers themselves to handle high-profile hot merchandise has created a sense of fragility about the whole asset class.
These kinds of deals are so often botched like Facebook, or designed to offer a huge pop like we had with Zynga and Groupon, as only a small amount of stock was released at first, that they cause real angst about how the stock market can really be the repository of your worth.
So it is worthwhile to point out that it's news when things work out as well as SNAP did. Now I am sure many of you blanch that I can be sanguine about a stock that now sells at 35x sales, almost twice what Facebook sold for when it came public, even as Facebook was on the verge of profitability and SNAP isn't anywhere near it.
I admit it is per-se overpriced for certain. A lot of that is because of the way Wall Street works. The syndicate desks parcel out stock to their best clients, and ask that they pledge to hold it. They agree but they don't get enough stock to make a difference to their funds' performance. Since they have pledged not to flip it, they have no choice but to go into the open market and buy more, paying up, to round out their positions. Hence why it goes to a premium. The average price that they end up with is still not a bargain, but they are indeed up on the position and that's a win for them.
I know that as long as the stock's hot and the vibe is hot, the company will get advertisers and more daily average users who will check it out and the momentum can remain strong. If I got some on the deal I would sell it now unless I was bound to hold it, because even as I think the revenues will double, making it half as cheap as 35x earnings, that is still more than twice I am willing to pay for even the highest-growth companies.
Just so you know the parameters, Alphabet (GOOGL) and Facebook sell at roughly the same multiple as Snap except the multiple is to earnings, not sales. (Facebook and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
I threw my hands up this morning and said that's the price of growth right now in a growth-starved tech world, and perhaps if the Snap people can take all that money and develop a whole network of products that can be advertised against that appeal to those who check their device 18 times a day, maybe they can pull it off. I find it unlikely and, again, wouldn't hold on to the stock. But that doesn't mean it can't go higher.
Twitter went dramatically higher before it crashed and burned. Facebook went the other way, crashing and burning when its desktop product slowed, only to be reborn when it figured out mobile.
So if I am so adamant that SNAP is too expensive, what does it matter if the deal went off without a hitch?
Let me give your four things that could have gone wrong today that didn't, instead of pointing out what's wrong, as so many columnists, commentators and money managers seem to do every day.
First, there turned out to be a lot of money around to buy shares in SNAP. I have seen time and again when you have a huge deal like SNAP -- 200 million shares at $17, which, of course, is huge -- it causes selling in like-minded stocks because of a paucity of cash dedicated to super-high-growth tech. Instead, there were small ripples down in the group but nothing special, in line with the declining market.
Second, despite the expensive price of the stock, because it was arrived at in a smooth, practiced way, there was no panic as we have seen so often and no sense that it really is the end of the run, which is something I have often been willing to say when these kinds of deals get out of hand. Yes, the stock's too expensive. But it was orderly, not violent, intelligently placed and not done to stampede.
Third, after yesterday's remarkable rally, you could have easily been subjected to a dramatic decline given that yesterday was a highly emotional move based on the demeanor of a new president and a coming rate hike. You could have easily expected either remorse from yesterday's run or some heavy profit-taking. Instead, you got neither even as oil was down badly, something that typically used to cause selloffs.
Finally, the stock of Caterpillar (CAT) , one of the market's leaders, got smashed, as its headquarters were raided by federal authorities for unknown reasons. This is a big Dow stock and it has a huge following. I know the issues may have been pertinent only to CAT, but in a tough market, many industrials would get hammered off this kind of price action. Instead, the group didn't even yawn.
So are we too complacent? No, we are simply, once again, going old school here. Before the Great Recession, when we would have bull runs and we paused, we used to call these consolidation days. They were signs of health, some small profit-taking that, in many ways, whet the appetite of those looking to get in, but did not cause such a huge decline as to either give you tremendous bargains or make you realize that it was all one gigantic short squeeze.
In short, a blah day following a raging bull run is a sign of health, especially when it is associated with a gigantic yet well-run IPO. It should bring out more buyers than sellers, and more IPOs of companies that had been fearful to tap the markets. No, it wasn't an up day. It was just the next closest thing to it.