Today is a very special day for me and the Uncommon Finance team as we have recently launched the index which we have been working on since April of last year:
The Uncommon IPO Index, the first global benchmark for companies based on innovative business models that have recently gone public (IPOs).
The index is comprised by companies that, through a creative and solid way, transform people’s lives and the economy. This has an impact in the growth of its economic activity and price listing, which undergoes through exponential increases.
It has been an intense, but rewarding effort, with a high degree of uncertainty and positive expectations.
Nowadays, there is a great opportunity to transform the economy and people’s lives. The future is in complete construction, we need ideas, infrastructures, and solutions. The habits, behaviors, and beliefs of billions of people are changing radically and companies that are awakening and lead that transformation are those that can take advantage of the volume, speed, and impact of those changes.
Seeing it from this perspective, anyone would want to jump on the bandwagon, but What´s the problem of valuing and investing in this type of company?
Hundreds of companies go public every year and many neither want nor will transform the world in which we live in. On the other hand, many even if they intend to do so, remain in the market for a while, and stay behind on the journey.
So the reflection we made was the following:
If there are companies that end up transforming the economy and society, because they introduce an innovation that is adopted by millions of people, those companies will grow the most until their product matures, and this should be reflected in their price listing.
In trying to answer these questions, we were faced with a double uncertainty:
1. Validating our idea:
First of all, we had no idea if our starting hypothesis made sense, and we had a lot of work to do before we could even prove it.
And this is something that usually happens with the analysis and development of ideas in the financial and economic world, you have an idea and a coherent and powerful work hypothesis and in the end, the results are really bad.
2. Special characteristics of an IPO in the financial market:
Most specialists, managers and analysts do not recommend investing in IPOS because, given that it is an offer (there is more supply than demand) the price listing decrease by pure arithmetic. And this is usually the case, but only for the first months.
In addition to uncertainties, we were also clear on few things:
1. These types of companies are the most profitable in the world. The well-known xbaggers, those that multiply your money several times (within a few years).
2. They are very uncertain models … but to some extent. A start up is an idea, pure uncertainty.
Most startups die within a short time, but those that survive become stronger much faster, it is the natural selection of the market.
A start up goes through many natural selection filters: Familiy and Friends, Business Angels, Venture Capitalists of various sizes and large private investment funds. Once they reach the stock market, they have already went through many market filters. Pareto’s law is reversed. The uncertainty of its model has been limited (and its future price on the stock market).
3. A holistic knowledge is needed to analyze these companies. Not only financial, nor only the business model, or simply the market. But all of them at once. Outsiders that see things from outside with the knowledge of seeing what´s inside.
4. One needs to get out of the literality and reach the meaning (without getting lost in the rhetoric). The literality component lies in the superfluous analysis of the indicators, the rhetoric in the world of value management, macro, and general analysis.
5. We know the ecosystem as users. We were born in the 80s, we are the border between the analog world and the digital natives.
6. We know the ecosystem as professionals. The team involved in creating the index is made up of diverse people who understand the particular angles where to look at: Venture building, Behavioral economics, Valuation of digital assets, forensic economics, etc.
With all of this in mind, we decided the following:
1. We studied all of the developed stock markets where IPOs were listed. We saw that all of the innovative companies that wanted to scale, in the end, went to the U.S. stock market (Nasdaq or NYSE). All of them.
It´s interesting to see how even in China they do the same thing. Customers in China do so in order to make money grow and fill the pockets of their founders in the mecca of contemporary capitalism.
2. There are no IPOs of innovative companies in Europe. Most of them are industrial, communications or energy. And most of them are small (small and without liquidity).
Where has Spotify gone given that it is European?
3. The information provided publicly in the U.S. is centralized, extensive, and in-depth. There are many stock markets in Europe.
Therefore, we focus on the U.S. market: in the IPOs of technology companies and new digital business models arising in that market.
*The only interesting market aside from the Nasdaq / NYSE is the London Stock Exchange. So, if everything went well, we would expand to the second one.
# What does the index consists of?
Within this index, there are no magic formulas, nor analysis of trends, nor derivatives, nor short term gains.
There are certain companies that enter the index, stay for 3 years and leave.
That´s it. Buy and maintain with a monthly rebalancing.
The weight of companies in the index is equal (all of them have the same weight). Given that we are very aware of uncertainty and are very aware that we can be wrong in our analyzes, we give the same value to all of them. In the long term, it is the most efficient way to control risk without introducing new complexity to real complexity and offers the best return / risk ratio.
These are the results from the last 4 years:
The vertical axis refers to the accumulated profitability since its inception (03/31/2015).
We are aware that the period is short, only 4 years, we still do not know whether these spectacular results can be favored by a time of innovation derived from a paradigm shift and require a larger context.
However, these 4 years have been complicated for management except for 2017.
In 2015 and 2016, we had some very significant drops where we thought that we were going back to a stock market crash, those two years were very difficult for managing of trends and momentum portfolios.
The last quarter of 2016 and 2017 were strong, but 2018 represented a challenge, January and December experienced downfalls: all of the assets have fallen, diversification has been very complex due to the distortion of risks caused by central banks.
So, although we are aware of this limitation in a prospective exercise (expectations towards the future), we also value the great uncertainty marked by this period.
In other words, in an environment of high uncertainty, companies that in themselves have high uncertainty have behaved (extraordinarily) well.
We have developed our own methodology which is based on a mixture of 3 approaches:
– The value of companies → Absolute parameters in their financial statements. Quantitative.
– Business models → Combination of 30 business models within categories and subcategories of the industry. Qualitative.
– Technical knowledge of markets → Absolute parameters on price listings. Quantitative.
For more information, see Index page.
The three criteria are under very clear and simple premises. As I mentioned above, leaving the literal side behind, but without falling into rhetorical arrogance. It must be as objective as possible.
As for the business models, we have developed an entire qualitative taxonomy, which is a mixture of economic taxonomy, technological taxonomy and taxonomy of digital models.
All this will serve us, not only to invest and participate in the business models that build the future (profitability), but also to do research and be able to apply it in many areas. Since we are explorers.
# Type of companies that make up the index
As of December 31, 2018, there were 26 companies in the index, and the TOP 5 were the following:
Mindbody Inc is a company that went public in 2015 and are in charge of digitizing everything related to welfare, they have B2C and B2B business models. Match Group went public in 2015 and participate in many online dating business. Atlassian Corporation, which also went public in 2015, offer a very powerful organization and teamwork software. MongoDB went public in 2017, it is one of the most powerful data base platforms. GoDaddy went public in 2015, is the largest domain registrations company on the internet in the world and all of us who have blogs / websites because it also offers the cheapest plans. The leader in domain management.
These five companies have an accumulated return upon entering in the index of 37.64% (MongoDB), 96.69% (GoDaddy), 176.04% (Match Group), 212.31% (Mindbody) and 219.15% (Atlassian Corporation).
One can already observe here that those that offer more profitability and have more punctual weight in the portfolio are those that have been in the index longer, because it has given them time to gain momentum.
If you want to follow the index, please visit-> https://uncommonfinance.com/tech-ipo-index/
Jorge Segura es especialista en estrategia financiera y análisis de activos intangibles y financieros. Es director de FIRE el programa de gestión financiera personal de Uncommon Finance. Si quieres seguir todos sus análisis suscríbete al blog y te enviaremos un email los domingos.