Weekly Issue: Taking an alternate track to gain exposure to several expected 2018 IPOs
KEY ACTIONS FROM THIS ISSUE:
- We are issuing a Buy on GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000) that closed last night at 0.63. Subscribers should be looking to buy the calls up to 0.85 and there is no stop loss recommendation for now, but we will look to add one as the calls move higher.
- We are adding the Utilities Select Sector SPDR ETF (XLU) March, 16 2018 51.00 calls (XLU180316C00051000) that closed last night at 1.00 to our active trading positions in XLU with a stop loss set at 0.50.
As we look back on 2017, there were 160 initial public offerings (IPOs), up from 105 in 2016. While there were several successful IPOs over the last 12 months — like Roku (ROKU), which soared 133% — most tend to leave a bitter taste in investors’ mouths. Blue Apron (APRN) and Snap (SNAP) are still fresh in the market’s memory. I’ve been critical of both companies and their shares over the last several months, so I will take a mini-victory lap of sorts on both. Of course, as we’ve all learned, it’s always best not to focus too much backslapping on what was.
As we look ahead, one area to examine is the IPO market in 2018. Even though we’re just a few weeks into 2018, we are already hearing about the companies lining up to become publicly traded entities in the coming year. One list formulated by MarketWatch suggests some likely 2018 IPO candidates include:
- Docusign, a company that developed technology to manage digital documents and signatures;
- Smartphone company Xiaomi;
- Sports merchandise company Fanatics;
- Streaming music service Spotify, which has filed with the Securities Exchange Commission for a direct listing instead of an IPO. With a direct listing, the company wouldn’t raise any money and use no underwriters to sell the stock, which equates to a less expensive going public transaction that doesn’t dilute existing shareholders;
- Biotech company 23andMe;
- Online storage company Dropbox.
Those are the likely candidates for IPOS. The MarketWatch article also shares some “long shots”, like Pinterest and big data company Palantir Technologies, which is backed by Peter Thiel and the Central Intelligence Agency’s venture capital arm called In-Q-Tel.
In the interest of full disclosure, I use both Spotify and Dropbox, and I have to say they are both great and worth every dime.
In reviewing that list of candidates and long shots, we find that three of them — Spotify, Dropbox and Palantir — are top five holdings at GSV Capital Corp. (GSVC). The company describes itself as a publicly traded entity “giving growth equity investors access to the world’s most dynamic, VC-backed private companies.” In short, it’s a public company that invests in private companies and looks to monetize its portfolio of holdings through either an IPO or other strategic exits such as an acquisition.
A full list of the company’s top 10 investments can be found here, but if were to aggregate the investments, we would find that roughly 35% of its portfolio is centered on cloud computing and big data. Those are two heavyweights inside our Connected Society and Disruptive Technologies investing themes.
Exiting the third quarter, GSV’s portfolio contained net assets of $209.4 million, or $9.69 per share, yet GSVC shares are currently trading at a deep discount. The key for GSVC shares will be the company’s ability to successfully monetize its investments, and with both Spotify and Dropbox going public, that looks increasingly likely over the coming months. Historically when holdings in GSV’s portfolio go public, it drives the company’s overall net asset value higher especially when those going public companies have been higher in profile like Spotify and Dropbox. As we saw in 2012, 2013 and this year, the shares tend to move in tandem with its more notable holdings, which included Facebook (FB), Twitter (TWTR) and Snap.
I know from experience, the road from filing to become public to becoming public can be fraught with several up and downs, most notably with the IPO price talk — and not all IPOs “work out.” Remember, I was rather critical of Blue Apron (APRN) and those shares cratered during 2017 and have fallen even further in 2018. I see Dropbox benefiting from the growing use of cloud and web-storage, while Spotify continues to benefit from the shift to streaming services as it monetizes its platform across its growing base of 70 million subscribers.
With the news that both Spotify and Dropbox will go public this year, GSVC shares have soared 42%, which is one reason why I’ve held off adding them to the Tematica Investing Select List… for now. I do see the follow-on IPO news driving GSVC shares incrementally higher in the coming months, especially if the two transactions are deemed “hot” IPOs. This should drive GSVC call options dramatically higher along the way.
Factoring in likely IPO timetables:
- We’re adding the GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000) that closed last night at 0.63.
- Note these calls have a wide berth about them between their bid/ask spread, which means using a limit order instead of a market order. Subscribers should be looking to buy the calls up to 0.85.
- Given that wide spread, we’ll hold off with a stop loss recommendation for now, but will look to add one as the calls move higher.
Continuing to hold with our XLU calls
Over the last five days, our two Utilities Select Sector SPDR ETF (XLU) call positions – the XLU Feb. 16, 2018 54.00 calls (XLU180216C000540000) and the XLU March 16, 2018 54.00 calls (XLU180316C000540000) were little changed. As we saw in yesterday’s December Industrial Production report, Utility output jumped 5.6% month over month as the initial impact of the cold winter weather was felt. Following that news, XLU shares have started to reverse the downward course they have been on in the recent past.
Earlier this month, the country was gripped with record or near-record low temperatures and that likely mean another jump in utility production as people crank the heat in their homes to stay warm. We’ll see that in the January Industrial Production report that lands in mid-February.
One potential strategy is to sit back and be patient with the two XLU call options we have in place. Another one would be to use the recent sell off in XLU shares to our advantage and add a third call option position – another layer if you will. From the looks of the forecast offered by the National Weather Forecast, it looks like we will continue to see relatively cold temperatures across the US in the upcoming weeks.
Putting that together, I am adding the XLU March, 16 2018 51.00 calls (XLU180316C00051000) that closed last night at 1.00 to our active trading positions. As we do this, let’s set a stop loss of .50, and plan on increasing it as the calls move higher. Subscribers should not look to acquire this new XLU call past 1.40, and should continue to hold their existing XLU Feb. 54 calls as well as the XLU March 54 calls.
- We are adding the Utilities Select Sector SPDR ETF (XLU) March, 16 2018 51.00 calls (XLU180316C00051000) that closed last night at 1.00 to our active trading positions with a stop loss set at 0.50.
