The start of unconditional trading resulted in a brief hiatus in the downward march of Deliveroo (ROO) shares since its London debut at the end of March. To make matters worse, shareholders could be faced with the prospect of industrial unrest, after some of the company’s delivery drivers went on strike over pay and working conditions.
The offering was supposed to herald an influx of tech listings on the London bourse, but it came at a time when questions were arising over how stocks that benefited from the lockdown would perform in its wake. There were also major concerns over the company’s dual-class structure and its potential impact on minority shareholders.
Nevertheless, gross proceeds from initial public offerings in the UK are at their highest quarterly run-rate in a decade. With the glaring exception of Deliveroo, newly listed companies have generally outperformed the market through the first quarter of 2021.
Prior to listing, Deliveroo’s intangibles accounted for around a third of non-current assets, a modest proportion for a nominal tech stock, and it is those intangibles which theoretically generate the bulk of value for these types of companies.
Perhaps the lukewarm reception was not specifically linked to the company’s immediate prospects. It may simply be that growth stocks – and the lofty multiples that support them – are falling out of fashion. This argument is supported by statistical trends over the past 12 months; Liberum notes that the cheapest FTSE 350 constituents, based on their historical price-to-book ratios, have been outperforming their costlier counterparts over the past 12 months.
Liberum analysts also make the point that the relative outperformance of growth stocks, or broadly speaking, small- to mid-caps, over the past decade is partly down to a shrinking equity base – driven largely by M&A and the proliferation of share buybacks. The broker estimates that a “cumulative net £5bn of listed equity has been taken out of the market since 2004”.
You always feel slightly nervous when you speculate whether the rotation from growth to value has become entrenched. After all, heavyweight growth stocks have outperformed their value counterparts since 2010. Just because the market has become wary over prospects for companies in areas that have thrived during the lockdown – subscription-based software services, home learning and the like – you needn’t think that you have to abandon tech wholesale.
It should be appreciated that tech is no longer automatically synonymous with growth; there are plenty of tech stocks with value characteristics operating in what are now mature markets, although you may need to look stateside to gain exposure.
Historically, investors have been able to get a steer on which investment styles were likely to gain prominence based solely on the risk-free rate of return, but a decade of stimulus has muddied the waters. It has been said before, but drawing assumptions based on the relationship between bonds and equities has not always held true in recent years.
So, although we have seen a marked rebound in valuations since the March 2020 sell-off, some might argue that we are operating in a risk-off trading environment, regardless of stimulus measures and vaccination roll-outs.
In a sense, it seems peculiar that some stocks have been priced towards infinity over the past decade, while portfolios based on fundamental analysis have underperformed. Yet externalities have played a major role as central banks have sought to guarantee liquidity above all else – fertile ground for the growth segment – but that cannot continue indefinitely.
