Exclusive Stock Market, Higher Stock Price

The total number of publicly listed U.S. stocks peaked in 1998 at 7,562.  At the end of 2015, the number was roughly half at 3,812 publicly traded U.S. stocks.

 

The number of companies offering their stock publicly in the U.S. is shrinking.  In the five years 1996 through 2000, an average of 548 companies went public a year.  That equates to more than two initial public offerings (IPOs) every single stock market trading day a year.  The total number of IPOs during this time was 2,742.  That is 780 more IPOs than the number of IPOs for the next 15 years.

Companies are waiting longer before going public as they are able to raise a significant amount of money in the private market.  From 1996 through 2000, companies were about three years old before they went public.  For the past five years, companies were nearly seven years old before they went public.

Merger and acquisition activity is reaching record highs today.  The high level of mergers and acquisitions relative to the diminished number of IPOs is a major driver of the shrinking number of publicly traded companies.

The stock market today is comprised of fewer companies, but they are much larger.  The average market capitalization of companies traded on the New York Stock Exchange (NYSE) in January of this year was $20.2 billion.  In January, 2004, the NYSE average market capitalization was $12.5 billion.

The secular change to fewer companies offering publicly tradable stock has the following ramifications:

1. On average, the stocks we buy today are shares of large, dominate companies.  In the late 1990s, many of the stocks traded were of companies that did not have a defensible market position or offer customers an important value proposition.  Those weakly positioned companies are no longer in business as independent entities or at all.  Think Google versus Ask Jeeves, Inktomi, Excite, Infoseek, AltaVista, Lycos, LookSmart, Pets.com, etc.
2. Large, industry-dominate companies usually are a less risky investment than smaller companies who have less product/customer diversification and less market share.  Lower risk helps raise the Price Earnings (P/E) multiple of the overall stock market and reduce volatility.
3. Large, industry-dominate companies have incredible access to capital and many have massive cash stockpiles – e.g., Apple (AAPL).  Much of this capital is being used to buy stock back, raise dividends and buy other companies (both public and private). Since 2010, Google has bought on average a company each week.  Apple, Microsoft, Cisco, Oracle, Amazon are also serial buyers.
4. There is a rising scarcity value of publicly traded U.S. equity.  Low trading costs and instant liquidity of the publicly traded equities market are significant positives relative to asset classes like real-estate and private equity including venture capital.  Scarcity, liquidity and low fees are a positive for valuation.

 

Today’s stock market is a case of “what does not kill you only makes you stronger.”  The roughly 3,650 surviving companies with publicly traded stock are substantially larger and better positioned than the average company was ten or fifteen years ago.  While the price of the stock market is higher, the quality of the market has also risen. 

One of the keys to investing is sifting through all available information and sticking to a plan.  Somehow, we need to control our emotions about something that is very important to each of us. We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com  to learn more.

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US Capital Wealth Management is your investment solutions partner. 

We are eager to speak with investors and investment advisors looking for a new trusted partner.
Please give us a call at 415-249-6337 if you would like to talk.

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This commentary and a sampling of previous editions are available as PDFs:

3/31/2017: Exclusive Stock Market, Higher Stock Price
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: Trade What Is, Not What You Think It Should Be – 2017 Outlook

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

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