You've Been Warned About Investing in IPOs

Investors went a little crazy the other day...

Whenever a hot new company debuts on the public market, it draws a lot of attention. These stocks can sometimes double or even triple in their first day of trading as folks scramble to scoop up shares.

But be careful buying into this kind of hype.

It doesn't typically last long. And that can lead to quick losses for those early buyers.

We saw a perfect example of this earlier this week...

Headline No. 1:

Vietnamese electric-vehicle ("EV") maker VinFast Auto (VFS) just debuted on the Nasdaq.

McCall's Call: VinFast became a public entity via a merger with special purpose acquisition company Black Spade Acquisition. Shares opened at $22 on Tuesday morning and immediately spiked – closing the day at $37.06.

That's a nearly 70% jump.

The rally pushed VinFast's market capitalization to $85 billion – which is bigger than both BMW (BMWYY) and Volkswagen (VWAGY).

I'd say it was a successful launch. But here's the wrinkle...

In May, VinFast told investors that it plans to sell 50,000 EVs this year. But through July, it had only sold 16,000. It sold just 137 of its VF 8 model in the United States. For comparison, Tesla (TSLA) sold about 466,000 EVs in its last quarter alone.

And while the company is building a factory in North Carolina that will produce up to 150,000 vehicles annually, it won't be up and running until at least 2025.

So it's way behind in its sales goals – and only sold a fraction of what other EV manufacturers have accomplished. It won't have the capacity to ramp up its production for a few years. And at its market debut, it was valued at $85 billion.

I find that... interesting.

I know a lot of folks are excited about VinFast's prospects. I'm more bullish on the future of EVs than most. But I'm also a smart investor, and I never ignore the facts in front of me.

Not only is VinFast's massive valuation incredibly hard to justify... there's simply no way it should be worth more than two of the top carmakers in the world.

This reminds me of when popular EV maker Rivian Automotive (RIVN) hit the market back in November 2021. There was a lot of hype around the automaker, partly because it had a long line of customers waiting to get their hands on its cars.

That was enough for folks to race in and buy its shares. The stock more than doubled in its first few trading days. Then, reality set in...

At its peak, Rivian shares traded at $172.01 – pushing its market cap up to $153 billion. But that didn't last for long. The stock turned lower quickly and has mostly fallen since. As you can see below, it's down about 72% from its initial public offering ("IPO") and 88% from its peak.

Today, Rivian has a market cap of $20 billion. And investors who bought in around its IPO and held their positions are sitting on big losses.

This is a good example of why you want to be careful with new and popular IPOs. They can be exciting, sure – especially when they take off right away. But the hype almost always dies down, and then you're left holding a company that isn't worth what you thought it was.

VinFast shares have already come down a lot from Tuesday's peak. But I suspect more downside could be ahead. A few months from now, shareholders may be in a similar position as early buyers of Rivian.

You've been warned.

Headline No. 2:

The U.S. has finally started to refill the Strategic Petroleum Reserve ("SPR").

McCall's Call: The government just put a floor in for oil prices. Over the past year, the White House has authorized sales from the SPR to try to bring oil prices down. This has largely been successful – oil is now down more than 30% from its highs last summer.

But those sales have left the SPR at its lowest level in more than 40 years. And that means the U.S. is unprepared for any long-term disruptions in oil supply.

President Joe Biden's administration had said that it would look to refill the SPR when oil traded between $67 to $72. But it has been at this level for months – trading as low as $67.70 per barrel recently – and there have been no purchases.

Until now...

With oil up about 20% from its 2023 lows, the government is finally refilling the SPR. Its level has increased by 600,000 barrels in just the past week. The past two weeks have seen the largest increases since 2020.

The SPR has grown by about 2 million barrels since late July. And while that may seem like a big increase, it's hardly a drop in the bucket. There are currently about 350 million barrels of crude in the SPR. So 2 million barrels represents an increase of just 0.6%. You can barely even see that on the above chart.

And since the U.S. uses about 20 million barrels of oil every day, the increase makes up only about 10% of our daily consumption.

The SPR's levels have declined by 273 million barrels over the past two years. At the government's current purchase rate, it would take 1,922 weeks to get the SPR back to that level. That's five years.

So there's no question that the government will need to continue buying up oil to refill the SPR. In fact, it will likely need to increase its purchases further.

That will act as a long-term tailwind for demand. And with Saudi Arabia extending production cuts and Russia curbing exports, the limited supply combined with stronger demand will push oil prices higher.

Here's to the future,

Matt McCall
Editor, Daily Insight
August 18, 2023

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