5 Hot IPOs That Hedge Funds Couldn’t Ignore

2016 was undoubtedly a meager one in terms of IPO activity. There were just 105 U.S IPOs last year, down from 170 in 2015 and 275 in 2014. Proceeds from U.S IPOs also fell heavily, to just $18.8 billion in 2016 from $86.6 billion in 2014. However, the IPO picture did improve somewhat in the fourth quarter of last year, as 30 companies went public, and that momentum has carried over into 2017, with Snap Inc (NYSE:SNAP)’s much heralded IPO being one of 25 so far this year. Those IPOs have raised nearly $10 billion in proceeds in 2017, or more than half of the proceeds that were raised throughout all of 2016 according to Renaissance Capital.

Among the many companies that went public in the final quarter of 2016, top hedge funds (including some of the 140 biggest and most famous activist hedge funds) were quite interested in several of them, buying up their shares to become some of their biggest shareholders. We track over 700 hedge funds and other institutional investors and analyze their quarterly 13F filings to identify stocks that they are collectively bullish on. One strategy that we have developed using this data has outperformed the market over the last year, and involves selecting the 100 best-performing funds in our system and identifying the 30 mid-cap stocks that they are the most bullish on collectively. Over the past year, this strategy generated returns of 39.7%, topping the 24.1% gain registered by S&P 500 ETFs. Insider Monkey’s enhanced small-cap strategy has also registered gains of more than 45% over the last 12 months and outperformed the SPY by more than 30 percentage points in the last 4.5 years (see the details).

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In this article, we’ve applied the same basic principle to last quarter’s IPOs and come out with a list of the five IPOs that the hedge funds in our system liked the most. We’ll analyze their performance and backers in this article.

5. GTY Technology Holdings Inc (NASDAQ:GTYH)

Top Hedge Fund Backers: 1. Elliott Associates (4.4 million shares) 2. Moore Capital Management (2.83 million shares) 3. Fir Tree (1.9 million shares)

GTY Technology Holdings Inc (NASDAQ:GTYH)’s IPO was a somewhat confusing one, as it initially went public on October 27 at $10 per share, before the stock was later split into three classes of shares, with the ticker symbol GTYH representing its Class A shares, and GTYHW representing its warrants (which are equal to one class A share). That didn’t stop 19 hedge funds that we track from buying 34.8% of GTY Technology’s shares in the fourth quarter, a higher ownership percentage than any of the other IPOs on the list.

A blank check company, it’s expected that GTY Technology Holdings Inc (NASDAQ:GTYH) will seek out a technology-related partnership, though the company has claimed that it’s open to deals in any business or industry. The company was founded in 2016 by William Green, Joe Tucci, and Harry You. Mr. Green served as Accenture Plc (NYSE:ACN)’s CEO for seven years, while Mr. Tucci was the CEO of EMC, which was purchased by Dell Inc. (NASDAQ:DELL) for $67 billion last year. Mr. You previously worked for both EMC and Accenture, among other companies.

4. Trivago NV – ADR (NASDAQ:TRVG)

Top Hedge Fund Backers: 1. Citadel Advisors (3.04 million shares) 2. PAR Capital Management (1.75 million shares) 3. Light Street Capital (1.32 million shares)

Expedia Inc (NASDAQ:EXPE) set Trivago NV – ADR (NASDAQ:TRVG) free in late-2016 (at least as far as investing in it goes, the company is still majority-owned by Expedia Inc (NASDAQ:EXPE)), as the hotel searching platform was unleashed on investors through a $287 million IPO in the middle of December. Expedia Inc (NASDAQ:EXPE), which paid about $531 million for a 62% stake in Trivago back in 2012, maintained its ownership of the company (which will be held in class B shares), while the rest of the company’s ownership was put on the block. While it had been planned for the IPO to have a share price of $13 to $15, it hit the market at just $11 per share, and has risen close to $13 since then.

Coverage of Trivago NV – ADR (NASDAQ:TRVG) was initiated by multiple leading investment firms on January 10, with four of them ranking the stock a ‘Buy’ or equivalent rating, while 3 rated it a ‘Hold’ or equivalent. Cowen, which had rated it ‘Outperform’ at the time, downgraded Trivago to ‘Market Perform’ on February 22, citing increased competition which will likely weigh on margin expansion. 22 hedge funds in our database bought shares of Trivago in the fourth quarter, owning 6.30% of its float. We deemed Trivago NV – ADR (NASDAQ:TRVG) to have one of the creepiest spokesmen ever at the end of last year.

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3. ZTO Express (Cayman) Inc (ADR) (NYSE:ZTO)

Top Hedge Fund Backers: 1. Zimmer Partners (3.64 million shares) 2. Segantii Capital (1.08 million shares) 3. Millennium Management (1.07 million shares)

ZTO Express (Cayman) Inc (ADR) (NYSE:ZTO) was the biggest IPO of 2016, with proceeds of $1.4 billion being raised by the firm, which eschewed the option to go public in China for a number of reasons. One was the fact that founder Meisong Lai would be able to retain control over his company despite only owning 28% of shares after the IPO, thanks to the U.S markets allowing for classes of shares with different voting rights, which China does not.

However, ZTO Express (Cayman) Inc (ADR) (NYSE:ZTO) has not fared particularly well since its debut, sliding to $13 per share and under $10 billion in market cap. Given the expected growth of nearly 24% annually through 2020 in the Chinese express delivery market, ZTO Express appears to be a relative bargain at the moment, trading at just 19-times 2017 expected earnings. That mark is also significantly lower than its Chinese rivals, which trade for as much as 106-times forward earnings. 24 hedge funds in our system bought shares of ZTO Express (Cayman) Inc (ADR) (NYSE:ZTO) in the fourth quarter.

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2. Extraction Oil & Gas Inc (NASDAQ:XOG)

Top Hedge Fund Backers: 1. Zimmer Partners (5.48 million shares) 2. Magnetar Capital (5.11 million shares) 3. Luminus Management (4.30 million shares)

Extraction Oil & Gas Inc (NASDAQ:XOG) was the first U.S exploration and production company to have an IPO in over two years, which enticed 24 hedge funds in our database to buy up 16.5% of the company’s shares in their first quarter on sale. Those shares were priced at $19 initially, and later topped out at over $25, but have since slid slightly beneath their IPO price.

Analysts are bullish on the company’s prospects despite the recent slump in oil prices, which has hurt the stock and opened a great entry point for those who missed out on the IPO. Citi upgraded Extraction Oil & Gas Inc (NASDAQ:XOG) to ‘Buy’ in early March due to shares’ extended weakness, while KLR and SunTrust each have ‘Buy’ ratings on the stock as well and believe the company is poised for tremendous growth. Extraction Oil & Gas Inc (NASDAQ:XOG) anticipates net sales volumes of between 48 and 54 MBoe/d in 2017, with the company planning for a big ramp up in production over the next two quarters.

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1. Athene Holding Ltd (NYSE:ATH)

Top Hedge Fund Backers: 1. Zimmer Partners (3.64 million shares) 2. Segantii Capital (1.08 million shares) 3. Millennium Management (1.07 million shares)

Athene Holding Ltd (NYSE:ATH) was the most popular IPO of the fourth quarter among the hedge funds in our system, with 31 of them buying shares of the stock. It’s also been one of the most successful IPOs of last year, with shares up by 13.37%, and that despite the recent announcement of a secondary offering of 27.5 million shares at $48.50 per share.

However, Athene Holding Ltd (NYSE:ATH) is now quite aggressively priced, which may not make it as attractive as some of the other options discussed earlier. With a price/book value of about 1.45, it’s priced far more richly than peers like Metlife Inc (NYSE:MET), which trades at a price/book ratio of just 0.85. However, Metlife also has an extremely low return on average assets, which Athene Holding Ltd (NYSE:ATH) does not, in part due to its riskier investments. Athene has been linked as a potential suitor for Fidelity Guaranty & Life should the latter’s merger with Anbang officially fall through.

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Disclosure: None