The initial public offering (IPO) market has not done well in 2023. The most recent deals have faltered, falling below their IPO pricing on day one or soon after. However, there is some hope that future IPO stock picks could be in store for better results.
MarketWatch recently reported comments from Ross Carmel, a partner at Sichenzia Ross Ference Carmel LLP (SRFC), a securities law firm with practice around public and private offerings.
“Recently, we have seen profitable companies like UL Solutions ULS, and Smith Douglas Homes SDHC, choosing to IPO, which again is a good sign for the capital markets,” Carmel told MarketWatch. “We will know the market has turned when new issues start consistently trading above their IPO price, and thus, investors are making a profit.”
The most recent example of a high-profile IPO faltering out of the gate is German sandal company Birkenstock Holding (NYSE:BIRK). It went public at $46, losing 12.6% on its first day, and trades around its IPO price six weeks later.
When markets move in one direction, contrarian investors move the other way. Interestingly, despite the poor performance of new issues in 2023, the Renaissance IPO ETF (NYSEARCA:IPO) is up more than 37% year-to-date (YTD).
Here are three stocks to buy from the ETF.
Stock Picks: Kenvue (KVUE)
The first of three IPO stock picks that went public in 2023 is Kenvue (NYSE:KVUE), the consumer health unit spun off by Johnson & Johnson (NYSE:JNJ) in May.
Kenvue shares gained 22.3% in their first day of trading. In the six months since, KVUE has given back all of those games and then some, down 8.4% since going public. KVUE is the second-largest holding with a 9.01% weighting.
On Nov. 20, Renaissance Capital, the people behind IPO, published an article about carve-outs, and the interest from investors in these IPOs. Kenvue is itself a carve out. What’s the attraction? That both the parent and the carve-out will perform better as independent entities. At least, that’s the theory anyway.
The current piece of news dogging Kenvue are potential lawsuits revolving around the company’s claims about phenylephrine in its prospectus.
“The allegations highlight that Kenvue’s IPO materials may have omitted significant information about the long-standing doubts over phenylephrine and the potential litigation risks associated with these challenges,” Investing.com reported.
You can find the section about Sudafed and Zyrtec-D on pg. 159 of its IPO prospectus. This is something to continue to watch.
At the end of the day, its well-known brands – Listerine, Tylenol, Neutrogena, Aveeno, Band-Aid, and many others – generated $2.48 billion in operating income in fiscal 2023 from nearly $15 billion of revenue.
Millions of people use its products now and will continue to in the future.
Savers Value Village (SVV)
I would say that Savers Value Village (NYSE:SVV) is the biggest unknown of the three. Not so much because of the brands – anyone who buys second-hand products would probably know them – but because it’s hard to know where the shares will ultimately end up.
SVV went public on June 28 at $18 a share, above its pre-IPO price range of $15 to $17. Its stock gained 27.3% on the first day of trading but is now down 22.2% from its $18 IPO price. SVV has a weighting of 0.08%, the second lowest among the 68 holdings in IPO.
The operator of 309 thrift stores in the U.S. and Canada reported its Q3 2023 results on Nov. 9.
Its net sales increased 3.8% to $392.7 million. Excluding currency, sales increased 5.0% to $397.4 million. Same-store sales were up 3.7% in the U.S. and 4.3% in Canada. On the bottom line, it generated an adjusted net income of $26.5 million, down 11.4% from $29.9 million a year earlier.
Savers’ revenue and same-store sales guidance for 2023 were revised lower in early November. Its shares fell 19% on the news. The stock has gained much of the losses back in the three weeks since.
Should the economy worsen in 2024, SVV should benefit from increased traffic from people looking to cut their apparel expenses.
Down 22% YTD, its share price should move higher in 2024.
Cava Group (CAVA)
Of the three 2023 IPO stock picks, Cava Group (NYSE:CAVA) has the best performance, up 52.7% since going public on June 14 at $22 a share, above its $19-$22 pre-IPO pricing. Cava is the 64th holding of IPO with a weighting of 0.14%.
My InvestorPlace colleague Josh Enomoto recently pointed out that the operator of 290 CAVA Mediterranean restaurants in 22 states and Washington, D.C. had a short interest of 20.6%. Further, Enomoto noted that analysts generally like CAVA stock, suggesting that a short squeeze is possible.
Cava reported Q3 2023 results on Nov. 7. Business remains healthy with nearly 50% revenue growth and 14.1% same-store sales growth. It opened 11 net new restaurants in the third quarter. Equally important is the fact its EBITDA was $19.79 million, 308.9% higher than Q3 2022.
Across the board, its outlook for 2023 is very positive. There is no question the business is doing well. The only uncertainty has to do with valuation.
CAVA’s current enterprise value is $3.82 billion, 140.6x its EBITDA while its price-to-sales ratio is 5.60. By comparison, Chipotle Mexican Grill (NASDAQ:CMG) has EV/EBITDA and P/S ratios of 33.8 and 6.44, respectively.
Given its sales growth, combined with rising store profits, CAVA isn’t nearly as overvalued as the shorts might think.
If you’re okay with risk, CAVA’s not a bad buy heading into 2024.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
