Should You Be Buying What Robinhood Is Selling?
The popular trading app isn’t the first to sell a piece of itself to its own customers.
3 min
This week’s initial public offering of Robinhood Markets Inc., HOOD 50.41% parent of the wildly popular trading app, isn’t just one of the most talked-about IPOs of 2021. It’s the latest in a long series of pitches to everyday investors: Share in your broker’s wealth by buying shares in your broker.
In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favour by taking roughly half your money and lighting it on fire instead.
Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.
On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.
Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”
Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.
Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.
For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.
In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.
Here in 2021, Robinhood’s offering is one of several trading and investing IPOs: Coinbase Global Inc., the cryptocurrency exchange, went public in April, and Acorns Grow Inc., which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.
One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.
Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.
In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.
Unlike Merrill, which was rescued from the brink of failure in 2008 when Bank of America Corp. agreed to buy the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.
However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.
Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.
How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.
Every once in a while, outside investors in a brokerage IPO do well.
Goldman Sachs Group Inc. began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.
Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.
That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.
That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”
On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.
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Food prices continue to rise at a rapid pace, surprising central banks and pressuring debt-laden governments
4 min
LONDON—Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts—literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
New data on Wednesday showed inflation in the U.K. fell sharply in April as energy prices cooled, following a similar pattern around Europe and in the U.S. But food prices were 19.3% higher than a year earlier.
The continued surge in food prices has caught central bankers off guard and pressured governments that are still reeling from the cost of last year’s emergency support to come to the rescue. And it is pressuring household budgets that are also under strain from rising borrowing costs.
In France, households have cut their food purchases by more than 10% since the invasion of Ukraine, while their purchases of energy have fallen by 4.8%.
In Germany, sales of food fell 1.1% in March from the previous month, and were down 10.3% from a year earlier, the largest drop since records began in 1994. According to the Federal Information Centre for Agriculture, meat consumption was lower in 2022 than at any time since records began in 1989, although it said that might partly reflect a continuing shift toward more plant-based diets.
Food retailers’ profit margins have contracted because they can’t pass on the entire price increases from their suppliers to their customers. Markus Mosa, chief executive of the Edeka supermarket chain, told German media that the company had stopped ordering products from several large suppliers because of rocketing prices.
A survey by the U.K.’s statistics agency earlier this month found that almost three-fifths of the poorest 20% of households were cutting back on food purchases.
“This is an access problem,” said Ludovic Subran, chief economist at insurer Allianz, who previously worked at the United Nations World Food Program. “Total food production has not plummeted. This is an entitlement crisis.”
Food accounts for a much larger share of consumer spending than energy, so a smaller rise in prices has a greater impact on budgets. The U.K.’s Resolution Foundation estimates that by the summer, the cumulative rise in food bills since 2020 will have amounted to 28 billion pounds, equivalent to $34.76 billion, outstripping the rise in energy bills, estimated at £25 billion.
“The cost of living crisis isn’t ending, it is just entering a new phase,” Torsten Bell, the research group’s chief executive, wrote in a recent report.
Food isn’t the only driver of inflation. In the U.K., the core rate of inflation—which excludes food and energy—rose to 6.8% in April from 6.2% in March, its highest level since 1992. Core inflation was close to its record high in the eurozone during the same month.
Still, Bank of England Gov. Andrew Bailey told lawmakers Tuesday that food prices now constitute a “fourth shock” to inflation after the bottlenecks that jammed supply chains during the Covid-19 pandemic, the rise in energy prices that accompanied Russia’s invasion of Ukraine, and surprisingly tight labor markets.
Europe’s governments spent heavily on supporting households as energy prices soared. Now they have less room to borrow given the surge in debt since the pandemic struck in 2020.
Some governments—including those of Italy, Spain and Portugal—have cut sales taxes on food products to ease the burden on consumers. Others are leaning on food retailers to keep their prices in check. In March, the French government negotiated an agreement with leading retailers to refrain from price rises if it is possible to do so.
Retailers have also come under scrutiny in Ireland and a number of other European countries. In the U.K., lawmakers have launched an investigation into the entire food supply chain “from farm to fork.”
“Yesterday I had the food producers into Downing Street, and we’ve also been talking to the supermarkets, to the farmers, looking at every element of the supply chain and what we can do to pass on some of the reduction in costs that are coming through to consumers as fast as possible,” U.K. Treasury Chief Jeremy Hunt said during The Wall Street Journal’s CEO Council Summit in London.
The government’s Competition and Markets Authority last week said it would take a closer look at retailers.
“Given ongoing concerns about high prices, we are stepping up our work in the grocery sector to help ensure competition is working well,” said Sarah Cardell, who heads the CMA.
Some economists expect that added scrutiny to yield concrete results, assuming retailers won’t want to tarnish their image and will lean on their suppliers to keep prices down.
“With supermarkets now more heavily under the political spotlight, we think it more likely that price momentum in the food basket slows,” said Sanjay Raja, an economist at Deutsche Bank.
It isn’t entirely clear why food prices have risen so fast for so long. In world commodity markets, which set the prices received by farmers, food prices have been falling since April 2022. But raw commodity costs are just one part of the final price. Consumers are also paying for processing, packaging, transport and distribution, and the size of the gap between the farm and the dining table is unusually wide.
The BOE’s Bailey thinks one reason for the bank having misjudged food prices is that food producers entered into longer-term but relatively expensive contracts with fertilizer, energy and other suppliers around the time of Russia’s invasion of Ukraine in their eagerness to guarantee availability at a time of uncertainty.
But as the pressures being placed on retailers suggest, some policy makers suspect that an increase in profit margins may also have played a role. Speaking to lawmakers, Bailey was wary of placing any blame on food suppliers.
“It’s a story about rebuilding margins that were squeezed in the early part of last year,” he said.
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