TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Fast and furious. New stock offerings are hitting the market faster than the winter’s snowstorms. So why are companies rushing to sell shares to the public? And is it a sign of market confidence or a bubble about to pop?
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: High drama at the highest court in the land. The issue: an Affordable Care Act requirement. And the outcome could have a big implication for business.
MATHISEN: Fish out of water. What California is doing to save its salmon industry and blunt the damage from the record drought?
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, March 25th.
GHARIB: Good evening, everyone.
It’s IPO season on Wall Street. The number of companies going public is soaring. And investors are salivating to get a taste of “Candy Crush.” King Digital Entertainment, the company behind that popular smartphone game, is issuing its initial public stock offering tomorrow when it begins trading on the New York Stock Exchange. And it’s expected to price tonight.
When a company decides to go public, it’s a sign of confidence in the markets and conviction that investor interest to own a piece of their business is high.
So, with the rush of companies staging IPOs, is this the right time to go public? And does it make sense for investors to add these newbies to their portfolios?
Seema Mody reports.
SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): An upbeat economy, rally on Wall Street and a string of successful listings have provided the ideal backdrop for private companies to go public. So far this year, 53 IPOs have come to market.
But the recent IPO craze and strong performance of newly listed companies has some traders wondering, are we in an IPO bubble?
DAVID MENLOW, IPOFINANCIAL.COM PRESIDENT: The bubble is about ready to pop at in point. We’re in a balloon at this point. And when an underwriter makes a misstep and they get too aggressive with the valuations and the investors say, no, not with me, not this time again, there’s going to be an immediate change. You’ll get revaluations that will come down dramatically, like they have been doing with some of the drug stocks.
MODY: According to FPU (ph) Capital Markets, of the companies that have gone public this year, only 13 are trading below their offer price, and seven of those from the biotech and pharmacies.
Another red flag is a strong performance of some recent IPOs despite the companies being unprofitable at the time of their IPO announcement. Like Intrawest Resorts, Akebia Therapeutics and Castlight Health, according to S&P Capital IQ.
Lastly, the huge opening returns of tech IPOs have made some investors nervous. Renaissance Capital says tech IPOs have been averaging a first day pop that is more than twice that of the average IPO this year.
(on camera): But experts say be cautious. Names that have moved up so fast have farther room to fall.
For NIGHTLY BUSINESS REPORT, I’m Seema Mody.
MATHISEN: And our guest tonight says the IPO market is in the initial stages of a correction. She’s Kathleen Smith, cofounder and chair of Renaissance Capital, which Seema just mentioned in her report.
Kathleen, welcome. Good to have you with us.
You heard David Menlow a moment ago describe the IPO climate right now as a balloon not a bubble. I’m not sure that’s not a distinction without a difference.
Is that how you see it? Is that what you’re saying?
KATHLEEN SMITH, RENAISSANCE CAPITAL CO-FOUNDER AND CHAIR: Yes. We think there is some IPO madness in the market currently. And particularly with the biotech stocks and the Cloud, the fast-growing Cloud technology stocks.
GHARIB: So, you know, people look at the IPO price, how an IPO does on the first day of its trading and how it does a little bit of time later. Based on that gauge, how are the companies that have been going public this year doing so far?
SMITH: Well, so far this year the average IPO first day of trading is up 22 percent. That is much higher than the norm about 13 percent to 15 percent. Although it’s not as high as it was in ’99-2000 when many of those first day pops were over 50 percent.
But the 22 percent number that we’re seeing currently is just not a sustainable number. So we don’t expect to see that continue. And there’ll be some adjustments to pricing to put a little bit more reason into the market.
MATHISEN: I guess those first day pops are the things that are so eye-catching, Kathy. But when you look out six months or a year, how do IPOs as a group typically do?
SMITH: Typi — it’s hard to know what typical is. The important thing is the market works well when investors make money beyond the first day pop.
And if you look at a basket of newly public companies — and for example the Renaissance IPO ETF, a year — in 2013, that index that attracts was up 54 percent. That’s dramatic. And those returns we hadn’t seen in a long time.
So far this year, that ETF is up almost 3 percent. It’s ahead of the S&P 500, but it’s fading a bit. We can see that those very big returns that we had in 2013 are — they’re there but not as dramatic as we had seen before.
Those returns have to stay positive relative to the market to have the whole IPO cycle work. So, we’re looking at that to say that stage, there needs to be some adjustment in pricing to get the market would word for investors.
GHARIB: I’d like to get your take on a couple of IPOs there’s a lot of excitement about. One that we just mentioned, “Candy Crush”, and the other one a lot of people are talking about is Alibaba, the Chinese Internet company that may go public sometime this year, maybe in the summertime.
What’s your take on these? Are these stocks that investors should take a serious look at and put it in their portfolios?
SMITH: Well, both of them have some amazing things associated with them. “Candy Crush”, a company that has — it running it — at about $2.8 billion in revenue just coming from nowhere on this one very popular “Candy Crush” game, and a profitable company. A worry could this be a one-hit wonder and what kind of revenue would you project going forward?
So, an amazing story that needs to be priced correctly. And tonight’s pricing will tell a lot about the investor reception of that.
In the case of Alibaba, this one could be the largest IPO ever. In fact, a major company, U.S.-listed company maybe one of the top 25. And that means that that company, it will be a very big offering. That company will probably end up in major institutional portfolios and possibly in the S&P 500 over time.
So, that is going to be one worth watching.
MATHISEN: All right. Kathleen, thank you very much. Kathleen Smith of Renaissance Capital.
GHARIB: A solid rally on Wall Street today. Investors were in the buying mood after a new report showed consumer confidence in March reaching a six-year high. The Dow shot up 91 points, the NASDAQ was up almost 8, still weighed down by trouble for biotech stocks. And the S&P also added eight months.
MATHISEN: Mixed news in housing. Home prices are rising a lot. The S&P Case-Shiller home price index for January found that home prices rose an average of 13 percent in the nation’s 20 largest cities from the same month a year earlier. But sales of new homes dipped more than 3 percent in February, sinking to a five-month low.
Wicked winter weather in many parts of the country, there you go again. That gets the blame.
GHARIB: An influential member of the Federal Reserve says he’s surprised at House markets fell after Fed Chief Janet Yellen hinted about raising a key interest rate next spring. But Philadelphia Federal Reserve Bank President Charles Plosser says that timetable for raising rates may not be a mistake.
(BEGIN VIDEO CLIP)
CHARLES PLOSSER, FED. RESERVE BANK OF PHILADELPHIA PRES.: If the market gets ahead of us, I’ve often said financial markets aren’t always patient. If they get ahead of us, then we’ll probably have to be faced with a situation where we’ll have to raise rates faster than we otherwise would have chosen to do. And that’s one of the great unknowns about this whole exit strategy.
(END VIDEO CLIP)
GHARIB: Plosser is also forecasting solid growth in the U.S. economy over the next two years, a pace of 3 percent in 2015, 4 percent in 2016.
MATHISEN: With General Motors (NYSE:GM) under scrutiny for what it knew about faulty ignition switches that resulted in a dozen crash-related deaths and when it knew it, some lawmakers have introduced new legislation to make sure there’s better reporting of auto safety records. Senators Ed Markey of Massachusetts and Richard Blumenthal of Connecticut introduced a bill that would require automakers to provide more information about fatal accidents involving their vehicles and give the public better access to those reports.
GHARIB: The Supreme Court says that severance pay can be taxed. In a big win for the Obama administration and the IRS, the high court ruled that Social Security and Medicare taxes must be paid on severance packages, paid to workers who are laid off involuntarily.
MATHISEN: But it’s another case that’s being heard by the Supreme Court today that could have wide-ranging impact on businesses and employees. What looks like a fight over forcing companies to pay for contraception has turned into a major battle over faith, business and the law.
Hampton Pearson has more.
HAMPTON PEARSON, NIGHYTLY BUSINESS REPORT CORRESPONDENT (voice-over): Outside of the Supreme Court, early spring snow didn’t dampen the enthusiasm of those on both sides of the constitutional challenge to the so-called contraceptive mandate in the Affordable Care Act.
Women’s rights activists begging justices to uphold the Obamacare requirement that employers provide birth control coverage at no extra charge.
Faith groups supporting the challenge from two family-run businesses that offering contraception violates their religious beliefs. The owners of Oklahoma retail giant Hobby Lobby with 600 scores and 13,000 employees are facing $100 a day fines that could cost the business $475 million a year for not providing contraception coverage. The firm is among at least 50 for-profit corporations nationwide claiming a religious based exemption from the health care law.
MATT BOMAN, ALLIANCE DEFENDING FREEDOM ATTORNEY: Anytime the government is telling you, your option is to pay a fine instead of practice your religion, that’s a substantial burden. And what Congress said and what the First Amendment says is that religious freedom, not being fined by the government, not being crippled with penalties, is the most important interest that we serve in this country.
PEARSON: The high court has never ruled that profit-making businesses have religious rights. The government and the courts, women justices warned, it could open the door to religious objects from employers for covering medical treatments like blood transfusions and vaccinations.
Big business powerhouses have stayed on the sideline. Neither the Chamber of Commerce nor the National Federation of Independent Business have filed friends briefs in this case.
Some court watchers say Chief Justice John Roberts may seek a compromise to stop short of taking on the corporate rights argument.
ELIZABETH WYDRA, CONSTITUTIONAL ACCOUNTABILITY CENTER: But if Hobby Lobby were to successfully blur the line between the views and beliefs of the individuals behind the company and the company itself, I think that could be very bad for business. That’s probably why we haven’t seen a lot of the major players in the business community come up and support Hobby Lobby.
PEARSON (on camera): A ruling in this case most likely in late June could clarify business’s religious rights going forward, but court watchers say the birth control mandate challenges are just the beginning of the legal fights over Obamacare that could last for another five years.
For NIGHTLY BUSINESS REPORT, I’m Hampton Pearson in Washington.
GHARIB: Still ahead, hot stocks turn cold. But is the pullback in some high-flying names a sign to avoid those stocks or an opportunity to buy in?
MATHISEN: The Obama administration proposed sweeping changes to the NSA’s surveillance records of American’s phone records. It now puts the burden of storing and searching phone records of millions of people on phone companies, instead of on the government. The president says the changes would help ease concerns about privacy while still keeping Americans safe.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Overall, I’m confident that it allows to us do what is necessary in order to deal with the dangers of the terrorists attacks, but does so in a way that addresses some of the concerns that people had raised.
(END VIDEO CLIP)
MATHISEN: Federal regulations already require phone companies to hold onto so-called metadata on all phone calls for 18 months. But that does not include records on the caller’s names or the content of those calls.
GHARIB: While the government and telecom giants monitor phone calls, computer systems across corporate America are being breached at an astounding rate. Federal agents notified more than 3,000 U.S. companies. These are from small mom and pop firms to major defense contractors that their computer networks were hacked last year.
Eamon Javers joins us now from Washington with more on those hack attacks.
It’s really a surprising revelation, Eamon. Tell us how this whole thing works. How often do the feds alert companies? How do they go about doing that?
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, the fed alert companies on an almost daily basis. When you’re talking about 3,000 different notifications during the course of 2013, that’s an almost daily occurrence, and they say what they want to do here is notify the companies either on the phone or in person. Clearly, these are companies that have had cyber intrusions and they want to have the federal agents show up in person to brief the company on what happened so that that communication itself is not monitored by the cyber attackers.
I had a chance to talk to special agent Tim Marsh earlier today from the FBI. And I asked him all about this program. He said it’s all about fundamentally increasing communication between the private sector and the government.
Take a listen.
(BEGIN VIDEO CLIP)
TIM MARSH, FBI CYBER DIVISION SPECIAL AGENT: There’s a lot of things that hit the news that just recently that are pretty devastating that have severe financial impact to companies. You know, there are a lot of companies that lose what they’ve been spending a lifetime developing and producing. And so, that is what we want to protect against. We want to stop the data bleed.
(END VIDEO CLIP)
JAVERS: Special agent Marsh says the whole purpose of this new program is to allow U.S. intelligence agencies to share some of the classified information they have with the companies that have now been the victim of these cyber attacks, guys.
MATHISEN: Eamon, do the companies even know that they have been hacked? And how does the government know what’s been stolen?
JAVERS: Yes. In many cases, Tyler, they don’t have any idea they’ve been hacked. This is the first they’ve heard of it. In many cases information comes from U.S. intelligence-gathering techniques and the FBI and intelligence agencies are being deliberately vague on exactly how they get that information. But they’re trying to give the companies a heads up when they have it.
GHARIB: And when they do give that heads up, Eamon, what are the companies suppose to do with that information? How specific is it?
JAVERS: Well, the FBI is saying they’re not the agency to tell you how to fix the problem. What they want to do is tell you exactly what they can about what happened to your company, as best they can about who’s doing it, and then the responses are really left up to the companies in most of these cases. They say here’s what the problem is. You guys have to go fix it.
MATHISEN: Snowy from Washington tonight, thanks very much, Eamon Javers.
JAVERS: You bet.
MATHISEN: All right. The U.S. steel industry says it is being slammed by cheap imports and it needs help. Unions and executives from companies like Nucor (NYSE:NUE) and Byer Steel Group are asking U.S. trade officials and Commerce Department to slap duties on cheap steel imports coming from South Korea, Mexico, Turkey, saying the U.S. steel industry could be on the verge of elimination unless something is done.
GHARIB: Embattled hedge fund king Steven A. Cohen may be looking to strike a deal with Wall Street regulators. Now, even though he’s never faced criminal charges, the billionaire founder of SAC Capital faces civil actions from the Securities and Exchange Commission for failing to supervise two fund managers at his firm who were convicted of insider trading. A settlement could include a ban on managing public money.
And we begin tonight’s “Market Focus” with an earning’s miss from Walgreen (NYSE:WAG).
Profits at the nation’s largest drugstore chain slipped slightly because of a slow down in generic introductions and a milder flu season. Walgreen (NYSE:WAG) expects the pressure from the generic slow down to ease by the end of the year. Shares rose more than 3 percent to $66.42.
McCormick (NYSE:MKC) also out with earnings today. This is the spice company. It beat both on the top and bottom lines, helped by its recent acquisition of a Chinese condiment maker. That sent shares up 5 1/2 percent to $71.20.
Shares of Carnival (NYSE:CCL) Cruise Lines tumbled after the cruise operator said it may lose money this quarter. The company cut its first full year forecast after it was forced to cut prices to attract passengers. Overall earnings did beat estimates and the CEO says Carnival (NYSE:CCL) is recovering in some parts of the world.
(BEGIN VIDEO CLIP)
ARNOLD DONALD, CARNIVAL CORPORATION CEO: We’ve seen good strength in Europe. In fact, our booking currents have been moved out. So, our occupancy rates are ahead of where they were last year. Looking for the quarter and then for the full year.
(END VIDEO CLIP)
GHARIB: Well, investors couldn’t get past that morning the stock fell about 5 percent to $38 and change.
MATHISEN: Jamie Dimon’s top aid Michael Cavanagh is leaving his position as the co-chief executive at JPMorgan’s Corporate and Investment Bank. Cavanagh will become the co-president and co-chief operating officer of the private equity firm Carlisle Group. This came as a surprise since Cavanagh was widely seen as a frontrunner to succeed Dimon as CEO, or it could mean merely that Dimon’s not going anywhere anytime soon. Shares of JPMorgan (NYSE:JPM) fell slightly nonetheless to $60.93.
The maker of Rayban and Oakley sunglasses, Luxottica, is teaming up with Google (NASDAQ:GOOG). The company signed a deal to design and manufacture glasses with the Google (NASDAQ:GOOG) Glass technology. Say that five times fast. That sent shares of the eyewear company up more than 4 percent to $56.20.
And the Canadian government reportedly blocked BlackBerry’s attempt to sell itself to the Chinese computer giant Lenovo last year, this according to reports. The smartphone maker was told that a Chinese or Russian investment would be met with stiff domestic opposition. So, BlackBerry abandoned the sale. Shares of BlackBerry were off a fraction today to $9.36.
The activist investor Dan Loeb of Third Point sues Sotheby’s to remove its shareholder rights plan. Loeb claims that that auction house is poison pill which put a cap on how much Sotheby’s stock his firm can own limits his efforts to shake up the company’s board. Sotheby says the poison pill protects existing shareholders. Shares of Sotheby’s up slightly to $43.07.
GHARIB: Tesla, Pandora, Yelp, these are just some of the stocks that posted the biggest gains over the past year, but now have suddenly lost momentum and seen their share prices stall. Does that mean it’s time to follow the crowd and sell, or is this the best time to dive right in?
Dominic Chu takes a look.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There’s an old saying in the trading world: The trend is your friend.
Momentum stocks take that concept and magnify it to a whole new level.
So what are momentum stocks?
BTIG chief global strategist Dan Greenhouse says momentum stocks are the ones that have high growth expectations built into their price. Value investors tend to stay away from them because they don’t like buying stocks at high prices no matter what the growth expectations are.
Greywolf Execution chief technical analyst Mark Newton says it’s even simpler. It’s how far a stock moves up or down in a certain period of time. The greater the price change, the higher the momentum.
Many traders have to treat these kinds of stocks differently.
MIKE MURPHY: A momentum stock is a stock that you can’t value, that’s not trading just on its valuation. It’s a company that’s gotten ahead of itself and is running just on the fact that people want to be in the name.
CHU: Some of these momentum stocks had great runs in 2013 that have continued into this year. But they’ve also seen sizeable pull backs from their recent highs.
Take coffee giant Keurig Green Mountain. The stock almost doubled last year and the trend continued this year. But the shares are 15 percent below their recent high.
Then, there’s Internet radio company Pandora, up almost three-fold over the past two years. It’s lost nearly a fifth of its value since hitting its high.
And then there’s electric carmaker Tesla, soaring 344 percent last year followed by another big gain this year. It’s 17 percent below its recent peak.
These stocks have big moves up or down.
MURPHY: If you’re going to invest in a momentum stock like a Netflix (NASDAQ:NFLX) or like a lot of the biotechs that are out there or like a Tesla, you really want to know what your exit strategy is and have it defined. So, as stocks are moving up and the momentum is in your favor, you want to make sure that you’re taking some off the table.
CHU (on camera): Having a strategy is one of the most important parts of trading in momentum stocks.
For NIGHTLY BUSINESS REPORT, I’m Dominic Chu.
MATHISEN: Coming up, a fish out of water. The lengths California is going to, to save its salmon industry, damaged by a record drought.
MATHISEN: Facebook (NASDAQ:FB) making a move into virtual reality. The company buying Oculus, a maker of that virtual reality technology for $2 billion in cash and stock.
GHARIB: We have an update for you on the Houston shipping channel. It’s been closed since Saturday when two ships collided causing a huge oil spill. As the cleanup of 170,000 gallons of heavy oil continues, the U.S. Coast Guard is gradually reopening the busy waterway to dozens of passenger ferries, fishing vessels, oil barges and other ships that have been waiting three days to re-enter the seaport.
MATHISEN: The West Coast drought has had a devastating impact on California’s meat, dairy and agricultural industry. Now even its seafood industry is being left high and dry. With water levels on the Sacramento River so low, millions of salmon can’t migrate to the Pacific to spawn. But those fish are now getting some help.
Morgan Brennan has the story from Rio Vista, California.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): This season, California’s young salmon population won’t be making its traditional fall run downstream.
Instead, thanks to the worst drought in recorded history, the U.S. Fish and Wildlife Services and partners are driving the state’s Chinook salmon smolt by land, via tanker trucks.
SCOTT HAMELBERG, U.S. FISH & WILDLIFE SERVICE: It’s a multimillion and may be even a billion dollar industry. So, by trucking these fish to the delta this year, it’s likely that industry will be sustained in 2016.
BRENNAN: Better known as baby king salmon, an estimated 32 million smolts will travel in 240 tanker trucks over the next 2 1/2 months, at a cost of $150,000 per week.
(on camera): That’s because the drought has hindered water levels in the Sacramento River and in the delta system along California’s coast, making it unsafe for these fish to swim the hundreds of miles from hatcheries out to the ocean.
Now, California has trucked salmon before, but never to this extent.
STAFFORD LEHR, CA (NASDAQ:CA) DEPT OF FISH & WILDLIFE CHIEF OF FISHERIES: The state normally trucks between 13 million to 16 million fish. This operation beginning today is essentially doubling the number of fish that we’d normally truck.
BRENNAN (voice-over): Experts say this initiative is imperative to the survival of the species, and a long-term tactic to ensure these smolts find their way back up the river in two or three years to reproduce.
Still, there’s a lot riding on this plan’s success. The salmon industry contributes an estimated $300 million annually to California’s economy, and employs nearly 3,000 people. And with global demand for salmon on the rise, if this year’s population is hindered by the drought, we could see tightened supply and higher prices for years to come.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in Rio, vista, California.
GHARIB: And finally tonight, Fat Head is a company best known for selling larger than life cut outs of sports stars and pop singers. And now, for a limited time, the company is selling you see it there giant cut out of Warren Buffett for just $30 a pop. It’s all to promote the Quicken Loan’s billion dollar bracket challenge for the NCAA college basketball tournament which the Buffett owned GEICO is insuring.
MATHISEN: Yes, but nobody’s going to win it. So he’s going to make money I think. That’s a little more Buffett than I need, frankly.
GHARIB: Yes. And all the profits go to Detroit charities so that’s a good thing.
That’s NIGHTLY BUSINESS REPORT for tonight. I’m Susie Gharib. Thanks for watching.
MATHISEN: I’m Tyler Mathisen. Have a great evening, everybody. We’ll see you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2014 CNBC, Inc.