Keeping Score (2024 IPOs edition)
2024 produced an unusually high rate of outperforming stocks. Some look more compelling than others going forward.
Happy New Year to everyone! I hope you all had a pleasant and reinvigorating holiday season. Publication of Misfit Alpha was a little slower recently, but this is the one time of the year when the spouse of an overseas State Department employee has some modest ambassadorial obligations. We should now be back to our regular(ish) schedule.
Let’s start 2025 with an overview of the 2024 IPO market, in general, and how the more “intriguing” issuances did last year.
As with most years, there was a lot of hype at the beginning of 2024 centered on several tech unicorns going public. Many prediction pieces claimed we would see companies like Stripe, Databricks, Shein, and Chime Financial go public. Reddit (NASDAQ: RDDT) was the only listing among the higher-profile companies to go public.
There were 225 IPOs on US exchanges in 2024 (I’m using stockanalysis.com as my database, but it has missed one or two in the past). Of that list of IPOs, 46 were special purpose acquisition companies (SPAC) placeholder stocks waiting to acquire a business because, apparently, we didn’t learn from 2021 that SPACs are an atrocious way to go public.
After filtering out these fugazi stocks, 32% of companies that went public have generated positive returns, and 19% of 2024 IPOs have generated market-beating returns. That is a surprisingly good result. By comparison, 23% of IPOs in 2023 generated positive returns (12% beat the market), and the performance of the 2023 issues has deteriorated since (17% still have positive returns, and only 8% are still beating the market).
The whole point of highlighting IPOs is identifying the crème de la crème in these markets. Last year, I highlighted 19 IPOS (ok, I wrote about 20, but one pulled its IPO days before going public, so I’ll take a mulligan on that one).
Let’s look at what I (possibly) got right, what (probably) was wrong, and the in-betweens.
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I was more optimistic about the IPOs we discussed than about 2023. Any positive view will take more time to play out, so I could say the jury is out on nearly all of them. However, several companies profiled outpaced the 24.9% total return of the S&P 500. All of these have been public for less than the full year, so the feat is even more impressive.
Landbridge Company (NYSE: LB): Up 179%
Astera Labs (NASDAQ: ALAB): Up 113%
Waystar Holding (NYSE: WAY): Up 77%
BrightSpring Health Services (NASDAQ: BTSG): Up 55%
Loar Holdings (NYSE: LOAR): Up 51%
BBB Foods (NASDAQ: TBBB): Up 48%
UL Solutions (NYSE: ULS): Up 44%
Guardian Pharmacy Services (NASDAQ: GRDN): Up 26%
I can’t pat myself on the back for all of these because I was skeptical of most of them. For one, I thought BrightSpring was another business that private equity dumped on the market without much chance of future success. I thought Astera Labs was an overvalued AI hype stock (it still is, but that doesn’t mean the hype can carry things further).
I also didn’t have “building data centers on royalty trust land where natural gas is cheap and abundant” on my AI Investment Thesis bingo card, so Landbridge’s results were quite surprising. 310 Value wrote about the opportunity for oil and gas royalty trusts quite a bit last year. He’s worth a follow.
I was also somewhat skeptical of UL Solutions because its parent non-profit entity made some questionable moves before going public. Those moves reeked of corporate governance failures that the market often overlooks in the short run.
I’ll take credit for three businesses I was optimistic about: BBB Foods, Loar Holdings, and Guardian Pharmacy Services. All three are spectacular businesses with bright futures.
I should also point out that Smith Douglas Homes (NYSE: SDHC) performed incredibly well for much of the year. Financially, the company has done quite well, and its balance sheet is in excellent shape. Unfortunately, it’s a homebuilder, and the entire industry has taken a shellacking over the past few months due to various concerns (cost of labor, sticky interest rates, etc.). I still hate its corporate structure, but you can paper over a gross corporate structure at five times earnings.
Three that I was dubious of that didn’t have a great 2024 were Lineage (NYSE: LINE), KinderCare Learning Centers (NYSE: KLC), and Tamboran Resources (NYSE: TBN). Lineage sounds like a great idea on paper, but the operational challenges and costs of running refrigerated warehouses and cold-chain assets make profitability much more volatile than most REITs. Tamboran isn’t a business yet, it’s plot of land that might have some natural gas under it. The company made some progress with some pilot drilling plans and an offtake agreement with a pipeline company, but it’s still a lot of sizzle without much steak.
I got KinderCare right but for the wrong reasons. My thesis was that the industry faces enough existential threats to avoid it. The likely explanation for the stock decline was decelerating revenue growth and mounting GAAP losses. I didn’t see that coming, but it worked out in my favor.
There are several too-soon-to-tell companies on the list — ServiceTitan (NASDAQ: TTAN), Anteris Technologies Global (NASDAQ: AVR), FrontView REIT (NYSE: FVR), Concentra Group Holdings (NYSE: CON). We can check in with them later.
And this is the part where I eat an uncomfortable amount of humble pie.
I can proudly say that I avoided the 56 IPOs that have lost more than 50% of their value since going public. Part of investing is avoiding mistakes, so here’s to avoiding the most catastrophic outcomes.
That said, I had my fair share of duds.
StandardAero (NASDAQ: SARO): Down 24%
Grupo Auna (NASDAQ: AUNA): Down 28.5%
Proficient Auto Logistics (NYSE: PAL): Down 45%
These aren’t necessarily broken thesis results (it has been less than a year). Also, part of StandardAero's risk was that the first 12 months would be challenging as it repays or refinances its high-interest debt and its private equity sponsors unload their positions.
Grupo Auna is a harder-to-understand business operating as a hybrid healthcare provider and insurance company. The business is solidly profitable on an operating basis but is still victim to its high-interest private loans. Hopefully, getting a corporate credit rating and issuing corporate debt will help ease that burden. I think there is something still there despite the bad start.
Proficient Auto Logistics is the exact type of company that gets me in trouble. It works in a niche aspect of a profitable industry (trucking, but for moving automobiles to and from dealerships) with a seemingly strong leadership team. The automotive market has been sluggish, so perhaps that explains the tough start. Management says it is winning significant service contracts with manufacturers and dealerships, so that may be a sign of better things to come, but it will take some significant improvements in 2025 and beyond to turn this one around.
If there wasn’t enough egg on my face, here’s the real kicker. I made jokes at the expense of two companies before they went public — Nano Nuclear Energy (NASDAQ: NNE) and Reddit. So, of course, the market gods laughed in my face as those two were the best-performing IPOs of 2024.
At the end of 2023, I had three IPO “resolutions” to take into the year.
Avoid companies with bad corporate structure and lots of related party transactions: I wasn’t great about following that one
Start from “no” and work out of it: I think I held to this one rather well.
Avoid biotech: I made it to December dabbling with a speculative healthcare company, but I think I learned a little more about the space. There were a few I looked at but immediately put in the “too hard” pile, which was largely to my benefit.
With the new year here, the resolutions I plan to take into the IPO experiment for 2025 are the following.
Write about what you read: I certainly can’t do writeups of 200+ issuances, but there were some I did more than scan the prospectus but didn’t write about them. Some of them ended up being strong-performing IPOs for the year.
If the job is to turn over stones, than leave no stone unturned. THe worst outcome is we have a few laughs at some of the silly (and possibly fraudulent) issuances throughout the year.
Companies that need to restructure debt post-IPO significantly will likely underperform in the short run. An IPO can recapitalize the balance sheet, but that doesn’t mean a business will pay down all its outstanding debts and issue new corporate debt at lower rates within a few weeks of going public. Debt reduction or refinancing can take a few quarters, which will likely give an investor some time to investigate the business instead of needing to buy within the week of going public.
Don’t touch biotech (again): It’s tempting to highlight some interesting biotech companies, but I’m guessing my ability to spot decent ones is no better than a coin flip. I’ll probably break this resolution, but that’s the whole point, right? Otherwise, we would all have to create entirely new resolutions each year.
Happy New Year to everyone, and here’s to turning over more stones in 2025.