Charts of the Day: Buybacks, IPOs, & M&A

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1 Charts of the Day: Buybacks, IPOs, & M&A Dan Wantrobski CMT (215) Research Analyst Certification and Important Disclosures start at the bottom of this document Over the past few years we have highlighted how the structure of the U.S. equity market has changed noting that (in our opinion) it has effectively shrunk in terms of selection (# of listed companies) and share count (buybacks), relative to the amount of money on the sidelines (generated from quantitative easing, parked in fixed income, or sitting in demand deposits). With focus once again turning toward underlying structural forces powering price and valuation, we provide updated charts from our marketing slide deck below. Buybacks

2 Chart 1 shows the S&P 500 (orange) against the number of buybacks completed by member companies each month (note this is not total shares / total dollar amount). As an example in February of 2015 there were 39 buyback programs completed by S&P 500 member companies. The takeaway here is a divergence between S&P price highs and transaction count: the peak in buybacks (as gauged by the number of announced / effective transactions) occurred in when the S&P was trading closer to Today, the S&P trades at new all time highs against lower transaction countso while it makes sense for folks to suggest this bull market has been powered by stock buybacks, one can argue there may be more drivers behind the cycle than buybacks alone. Even when we look at this in terms of total dollar amount, the divergence still exists: IPOs New issuance is another indicator we have periodically used to measure the size/breadth of the equity markets. The word bubble is tossed around more frequently these days referring to both equity prices / values as well year over year IPO growth. While we agree that new issuance has experienced significant year over year increases, the absolute numbers still pale in comparison to the peak of the IPO market which occurred nearly 20 years ago in 1996:

3 In the chart above we show the number of quality new issuance since Our data set excludes those IPOs with an offer price below $5.00 per share, as well as unit offers, ADRs, closed end funds, oil & gas LPs, REITs, and S&Ls (often referred to as serial issuers). The takeaway here is that while quality IPO issuance is up +122% over the past three years, it is still down approximately 70% from its all time highs posted in Inside the broader IPO market, an interesting shift has taken place between the technology and biotechnology sectors: for the first time ever, the number of biotech IPOs has eclipsed those stemming from traditional technology companies:

4 The peak in tech IPOs occurred in 1999 alongside what many believe was the top of the tech / stock market bubble. Though the sector has since rebounded off its 2008 lows, IPO issuance in technology is still down by more than 80% from those 1999 highs. In contrast, biotechnology has now eclipsed technology in terms of IPO activity, and is up +32% from its 1999 peak. This has sparked some discussion as to whether or not there is a bubble forming here:

5 While we agree there is some froth in the biotechnology sector at this time in terms of price (overbought), relative strength (overbought), and IPO activity (new all time highs), we are not convinced that we are at the absolute peak of a bubble in this sector. We looked at how the tech and biotech sectors influenced the broader (quality) IPO markets dating back to 1980 and in this regard (ie if we were to use history as any guide), biotech currently drives nowhere near the amount of IPO activity that technology did back in its heyday: At the height of the tech bubble back in 1999, technology IPOs accounted for approximately 77% of IPO activity in comparison, though the biotech sector has seen tremendous growth in this area over the last several years, today it accounts for roughly 36% of all (quality) IPOs (quarterly data, 12/2014). A separate but interesting overlay to this IPO study is the number of listed companies that have tradable float. Wilshire Associates is known for its popular Wilshire 5000 Total Market Index the company notes on its website that this index measures the performance of all U.S. equity securities with readily available price data. The benchmark dates back to the mid 1970s, but has rarely been comprised of exactly 5,000 stocks at any given time:

6 As a gauge of individual stock selection, the Wilshire 5000 has declined by nearly 50% from its peak in 1998 (7,562 stocks). Thus far, new issuance (as seen in the IPO charts above) has not effectively replaced the number of securities lost, even though the Wilshire is showing more recent signs of stabilization in this regard. M&A One final chart we typically include in our slide deck is the overlay of M&A activity against a broad equity market gauge such as the S&P 500. Typically we have found there to be a loose positive correlation between the two. But again as with the case of buyback and IPO activity new price highs on the S&P have not been met by new highs in M&A:

7 In the chart above, we plot the S&P 500 against M&A value dating back to The directional correlation here has recently experienced some diversion both with a nominal downturn in M&A (since mid 2014), but also in the lower highs that were posted last year against higher highs on the S&P 500 (white circles). While we normally look at such negative divergences as bearish for stock charts, the takeaway from this chart is that M&A activity has not yet eclipsed the frenzy which ushered in the top of the housing / credit bubble back in Our Take: We think it could be relatively easy for bears to use the charts provided above to argue for another (secular) downturn ahead however, we look at it in a different light the wall of worry: new alltime price highs in benchmarks such as the S&P 500 are not being accompanied by a frenzy of activity in and around the stock markets buybacks, IPOs, M&A all made new highs at the tops of prior market cycles (when the S&P was trading at 27Xs and > 30Xs respectively) while today (although elevated), they still reside well below these prior peaks (as trading volumes remain at multi year lows to boot ). Does this imply a bubble? We don t think so. Our belief is that while such conditions could certainly lead to volatile corrections ahead (starting today perhaps?), they are not consistent with prior topping cycles and thus any market downturns ahead are likely to occur within the context of an ongoing reflationary expansion cycle here in the U.S. Follow Janney Technical Strategy on Connect with me: Dan Wantrobski, CMT

8 Janney Montgomery Scott LLC Managing Director Technical Research 1801 Market Street Philadelphia PA O: M: Technical opinions expressed in this report are not dependent upon the opinion of the fundamental analyst covering any security. Accordingly, the Technical opinions contained herein may differ from those of the fundamental analysts. Copies of the Fundamental Analysis reports are available upon request. All charts courtesy of Bloomberg. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES Research Analyst Certification I, Dan Wantrobski, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report. Janney Montgomery Scott LLC ( JMS ) Equity Research Disclosure Legend 1. JMS is a market maker in the securities of the company and may at any time hold a long or short position in this security. 2. The research analyst primarily responsible for preparing this research report or a member of the research analyst s household has a financial interest in the securities of the company in the form of a long position in such securities. 3. The research analyst primarily responsible for preparing this research report or a member of the research analyst s household has a financial interest in the securities of the company in the form of options (O), warrants (W), futures (F), and/or a short position (S). 4. JMS or an affiliate managed or co-managed a public offering of securities for the company in the past 12 months. 5. JMS or an affiliate received compensation for investment banking services from the company in the past 12 months. 6. JMS or an affiliate received compensation for products or services other than investment banking services from the company in the past 12 months. 7. JMS may seek compensation for investment banking services from the subject company (ies) in the next 3 months. 8. The research analyst is compensated based on, in part, JMS s profitability, which includes its investment banking revenues. 9. JMS or an affiliate beneficially owns 1% or more of any class of common equity securities of the company. 10. An Employee or Director of JMS is an officer or Director of subject company. 11. Other:

9 Janney Montgomery Scott Ratings Distribution as of 12/31/14 IB Serv./Past 12 Mos.* Rating Count Percent Count Percent BUY [B] NEUTRAL [N] SELL [S] *As a percent of total coverage. See ratings definition above. Approved with updated chart. Definition of Ratings BUY: Janney expects that the subject company will appreciate in value. Additionally, we expect that the subject company will outperform comparable companies within its sector. NEUTRAL: Janney believes that the subject company is fairly valued and will perform in line with comparable companies within its sector. Investors may add to current positions on short-term weakness and sell on strength as the valuations or fundamentals become more or less attractive. SELL: Janney expects that the subject company will likely decline in value and will underperform comparable companies within its sector. Other Disclosures Investment opinions are based on each stock s 6-12 month return potential. Our ratings are not based on formal price targets, however our analysts will discuss fair value and/or target price ranges in research reports. Decisions to buy or sell a stock should be based on the investor s investment objectives and risk tolerance and should not rely solely on the rating. Investors should read carefully the entire research report, which provides a more complete discussion of the analyst s views. This research report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors,

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