Bright Horizons’ winning IPO, courtesy of Bain Capital
WASHINGTON, January 25, 2013 – Today once again, we’re half a day short, but a dollar long on our column. Blame it mostly on the frantic pace of this week’s market, whose seemingly irresistible upside momentum is really a wonder to behold, given that nothing in Washington has remotely been fixed at this point.
All the normal techniques of entering and exiting investments seem to have gone by the wayside, overwhelmed by the continuing flood-tide of money flowing into stocks courtesy of the Fed’s never-ending QE-Infinity. Add to this another spectacular IPO today—Bright Horizons Family Solutions Inc. (symbol: BFAM)—and the bulls are stampeding again.
The market’s current exuberance is disconcerting to old-timers like this columnist. Oh, don’t get us wrong—we love these parabolic moves up as much as anyone, given that we’re generally optimists at heart and love to see these stampedes. But volume still tends to be well-below historic standards, leading us to doubt the staying power of the current rally.
More disconcerting is the apparent re-entry into the market of at least a small cadre of individual investors. That’s always a bad sign for an unfortunate reason: the little guys tend to be disastrously wrong in their timing which may mean that institutions are now happily dumping stocks into small investors’ hands while shilling for their increasingly nonexistent positions on CNBC.
Given recent investing history we just can’t get past the notion that the little guys once again will get left holding the bag when the Big Boys pull the football away from them as they’re about to kick, just like Lucy vs. the forever hapless Charlie Brown.
On the other hand, one of the main reasons the Fed is pushing tons of cash into the banking system is precisely because the government want institutional and individual investors alike to buy stocks hand over fist. New houses, too, for that matter.
The Fed at this point is clearly not so much interested in inflation in terms of the value of the dollar. Rather, the Fed wants to inflate the value of key asset classes—stocks and bonds—in order to return at least the feeling of pre-2007 wealth to a populace that’s been badly bruised by banks, hedge funds, institutional investors, and the government itself, all of whom gamed the system—and the taxpayers—for fun and profit and a Get Out of Jail Free card.
As evidence for the effect of the Fed’s continued pump priming, we offer January’s IPO record. It’s a good one if you’ve been selectively snapping these things up. We’re ahead on every one we’ve bought at the moment, save for USA Compression Partners (USAC) which is still slightly below its IPO price roughly a week from the day it came public.
On the other hand, IPOs and secondary offers of stocks in the MLP category (primarily oil and gas partnerships) have done well, allowing us to contemplate selling them for 20-40% profits or hang on and collect dividends ranging roughly from 5-12% at today’s prices.
A real surprise turned out to be the “unexpectedly” (by the Maven anyway) hot Norwegian Cruise Lines (NCLH) IPO. It’s been wilting slightly over the last couple of days as flippers are dumping some of it. But our position is still up over 40% from the offering price.
A similar surprise happened this morning when we got our hands on a modest number of shares in the IPO of Bright Horizons Family Solutions, Inc. (BFAM). Readers who have to park their youngsters off somewhere during the day so they can head for work and bitterly cling to their middle class status may very well recognize this name.
The company is “a longtime provider of child care and early education services as well as other services designed to help employers and families better address the challenges of work and life,” according to a brief description in the IPO section of Schwab’s website.
The company’s primary business is providing such services on a contractual basis, often at the actual corporate locations where the moms and dads of little tykes actually work. BFAM used to be publicly traded back in the day. But they, like so many individuals and entities, ran into trouble early in the market’s 2007-2009 swoon. They’d not been particularly well-run to begin with.
But the early days of Great Depression II launched a tsunami of layoffs that scooped up mass quantities of Bright Horizons’ prime customers—young moms and dads—and sent them off to the Phantom Zone of Perpetual Redundancy, a situation that remains largely intact.
Enter the vulture venture capitalists from Bain Capital. Bain took Bright Horizons private right in the middle of the financial collapse (2008) and proceeded to do what they usually do: root out incompetent management, do some right sizing, rationalize the core business, and put the company back on the road to eventual solvency.
That said, Bain also did what companies like Bain always do; namely, incurring lots of debt en route to both purchasing and then improving Bright Horizons, they loaded up Bright Horizons with debt. So part of the reason they decided to bring the company public once again was to begin to recoup their investment, and, hopefully, profit in the process.
Normally, we’re suspicious of offers where the venture capitalists are looking to reap big profits via IPOing their earlier investments. In this case, Bain only put out about 20% of Bright Horizons’ new stock on this IPO offer.
This, of course, is a good news/bad news situation. The bad news is that Bain could dump more stock on the market at any given time and probably will, in which case existing investors will get diluted, most likely.
The good news is that if Bain is still holding on to 80% of the stock, they think it will start going up when the public perceives that the company’s spruced up business model and balance sheet are continuing to improve. That way, Bain can profit at later intervals by selling the rest of their stock into the market at much higher prices.
Bain actually has a good record of accomplishing the latter, Mitt Romney’s detractors last fall to the contrary. The investing public has apparently agreed. BFAM was provisionally priced in the range of $19-21 per share. But it’s final price was a dollar above the high point in the range: $22.
Facebook (FB) IPO debacle aside, these days, when an IPO prices above range, that’s often, a sign that the deal has plenty of takers even at the higher price. This proved true for BFAM which took off like a rocket when trading opened on the issue. The stock is currently trading (circa 2 p.m. EST) at $28 and change, roughly a 30% improvement over its offering price.
Needless to say, we have warm feelings toward Bain Capital today since they clearly worked with the underwriting syndicate to give BFAM a nice opening pop, which every investor who grabs such an issue can seriously appreciate.
So much for the evils of our American robber barons. This sort of thing is the kind of story the press never bothered to report last fall. Then again, what else did we expect from this mendacious pack of faux socialists?
At any rate, we’re happy. But, as we’ve mentioned before, under Schwab’s house rules, we can’t flip Bright Horizons until we’ve held it for at least 30 days (without losing our ability to get hold of more IPOs), so the real flippers, and Mr. Market himself are likely to squeeze our margins here at least a little bit until late February.
That said, if recent history holds true, we’ll still end up raking in a roughly 20% profit on a worst-case basis, so why cry about it? You certainly won’t get this rate of return in T-bills or in your so-called interest-bearing checking account.
That’s the kind of day it’s been so far. Nonetheless, we continue to dribble out of profitable (and a few unprofitable) positions to raise some cash. This delightful bull run can and will end, at least for a bit, with hardly a bit of notice, so it’s best to be prudent and take some of our winnings off the table.
Always remember, the Big Boyz are laying for you deep in the bowels of Wall Street (or on the beach in the Caymans), so don’t make it easy for them by getting greedy. You can see the bits of selling already going on at the margins of this market. You’re being warned, and it’s best to take the warning seriously. We’ve seen this game before.
So again, we’re lightening up bit by bit, and are also increasing our tiny position in SH, the somewhat unpredictable ETF that approximates being short the S&P 500. The position we have is down a bit at the moment. But when the market turns, which it eventually will, we’ll be positioned to have some cushioning on the downside. SDS, the double short S&P 500 (SPY) ETF actually has more juice. But it’s treacherous, so we’ll hold off on that route for now, even as we enjoy what’s likely the end-game of this current bull run.
Have a good weekend, and we’ll be back on Monday with more whining and opining.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any ar500ticle under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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