Could a Glencore IPO Signal a Top in the Commodity Market?

by: NakedValue

According to reports on CNBC and other media venues, Glencore, the world’s largest commodities trader, is considering an initial public offering. The timing for such an offering couldn’t be better with commodity and energy prices at or pushing toward all time highs. Because of aggressive global monetary policy and promising global demand, commodities were some of the top performers in 2010. While many investment funds are lining up with excitement, investors may want to approach with caution.

Glencore is widely considered one of the biggest and brightest players in the global commodities space. The conventional wisdom suggests that if the company is looking to unload shares then investors should think long and hard about the company’s implied near term prospects. Based on the company’s size, reputation and market reach to the average investor, a Glencore IPO may seem casually similar to the IPOs of Goldman Sachs and Blackstone Group. Both companies were respected leaders in their respective businesses. And in both cases, the industries faced sharp declines following the IPOs.

Goldman Sachs had its IPO on May 4, 1999, and offered a 12% stake to the public.

  • GS adjusted closing price (May 4, 1999): $63.56
  • GS adjusted closing price (May 4, 2000): $82.46
  • GS adjusted closing price (May 4, 2001): $89.29

Blackstone Group had its IPO on June 22, 2007, and offered a 12.3% stake to the public.

  • BX adjusted closing price (June 22, 2007): $27.84
  • BX adjusted closing price (June 23, 2008): $15.23
  • BX adjusted closing price (June 22, 2009): $10.41

Goldman Sachs’ stock price performed well in the subsequent years while Blackstone Group’s stock price plummeted. In both cases, though, the IPOs preceded major broad market downturns by a year or less. These two examples are not by themselves instructive and until we read more about Glencore’s financials we can’t formulate a solid investing thesis. But while the IPO will likely garner a great deal of headlines and excitement investors should not be afraid to wonder ... If the smartest guys in the room are selling, what does that say about the buyers?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.