Wall Street is forecasting a better backdrop for companies that want to go public. That’s promising news for two portfolio names in very different industries. January was the best month in nearly two years for initial public offerings, according to Goldman Sachs’ IPO Issuance Barometer. The metric, which indicates how conducive the macro environment is for IPOs, rose to 119 last month. This marked its highest level since February of 2022. A score of 100, for context, is the average rate for IPOs. Goldman attributed January’s strength to a monthslong decline in bond yields as the market at the time had been forecasting many more Federal Reserve interest rate cuts this year than the central bank itself was projecting. More recently, yields have ticked up as stronger-than-expected economic growth and cool inflation data continued to pour in, and the market got less dovish. Tuesday will be the latest test of the “will the Federal Reserve cut rates sooner, or later” when the consumer price index is released before the opening bell. While lower rates can stoke the IPO market, fewer rate cuts because the economy remains strong with cooling inflation should still be viewed as favorable. This would be the good news is good news scenario. “We expect the U.S. economy will continue to grow, the nominal 2-year UST yield will decline modestly, and valuations will remain elevated relative to history,” the Goldman analysts wrote in a research note last week. “If soft data improve to match the hard economic data and equity investor pricing of economic growth, it could lead to a further increase in our IPO Issuance Barometer in coming months.” Case in point, high-profile companies like social sharing forum Reddit , fast-fashion retailer Shein, and e-commerce and payment processing giant Stripe are all said to be in talks to go public in 2024. Here’s a breakdown of how our Club holdings Morgan Stanley and Danaher would benefit from more IPO activity. MS YTD mountain Morgan Stanley (MS) year-to-date performance First, a pickup in IPOs should boost Morgan Stanley’s crucial investment banking segment. The IPO market and mergers and acquisitions (M & A) activity started to sour when the Fed began hiking interest rates back in March 2022. Companies became more conservative with capital to protect against an economic downturn, weighing on the Wall Street giant’s profits for several quarters. While Morgan Stanley didn’t see huge improvements in IB performance during its recent quarter, we believe new CEO Ted Pick’s conservative macro outlook set realistic expectations for investors moving forward. The Club still is optimistic about Morgan Stanley’s IB as a key growth and cash generator, for the firm. “When you get this kind of cautious commentary from a new CEO, my gut says he’s simply trying to lower expectations to play the [under promise, over deliver] game,” Jim Cramer said last month. “Plus, Morgan Stanley’s paying you to wait with that 4% [annual dividend] yield, and they’re right in there buying with you thanks to their aggressive buyback.” A strong IPO market overall is expected to also benefit burgeoning biotechnology firms, which would mean more business for Danaher. In fact, Raymond James said Monday that 2024 is the strongest start for biotech IPOs in three years. Any increase in biotech IPOs, and/or further funding of the industry, means greater demand for Danaher’s bioprocessing products and services that are needed in drug development. DHR YTD mountain Danaher (DHR) year-to-date performance After reporting a strong quarter to wrap up 2023, Danaher issued conservative guidance — not yet ready to call the inflection in bioprocessing just yet. Biotech firms, which are key Danaher customers, have been grappling with a more challenging funding environment over the past two years due to higher borrowing costs due to elevated interest rates and the blowup of Silicon Valley Bank, a main backer of the industry. “Renewed confidence that biotech will trade less encumbered by the overhang of interest rates could be the catalyst the sector is looking for,” Raymond James analysts wrote. “With solid news flow from a clinical and regulatory perspective, consistent M & A activity, and healthy capital markets, the fundamentals for the sector are all in place for strong performance.” (Jim Cramer’s Charitable Trust is long MS, DHR. See here for a full list of the stocks.) 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Wall Street is forecasting a better backdrop for companies that want to go public. That’s promising news for two portfolio names in very different industries.
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