How the SpaceX IPO could hurt your portfolio

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Tuesday. Today is Tuesday, May 5th.

Today I want to talk about something I haven't seen mentioned anywhere else — how the SpaceX IPO could actually hurt your portfolio, whether you buy a single share of SpaceX or not.

The Fund Manager Problem

SpaceX is likely to enter the market as one of the top 10 most valuable companies in the world.

Think about what that means for the guy running a $10 or $20 billion tech fund at T. Rowe Price.

He has to ask himself three questions.

Do I want to buy SpaceX?

How much can I buy?

And most importantly — what do I sell to make room for it?

Every fund manager running money on Wall Street right now is asking themselves that exact same question.

There are rules in portfolio management about concentration limits, diversification requirements, and exposure percentages.

If you want SpaceX, something else has to go.

What Goldman Sachs Found

Goldman Sachs put out a report last week noting that US mutual funds historically held more cash ahead of major IPOs — but they haven't done so this year.

That tells you something.

Either fund managers have already decided they need to sell existing positions to make room for SpaceX.

Or they're looking at the valuation and deciding this is a retail investor party — stepping back and waiting for the stock to come down to earth before they get involved.

Goldman also noted that large IPOs don't usually affect the performance of big company stocks.

But this IPO is different.

SpaceX isn't going to be a mid-cap addition to the index.

It's going to be Mag 8, Mag 10 — right up there at the top of the market cap rankings from day one.

What I'm Doing

I have zero interest in buying SpaceX on the IPO.

Not at that valuation.

I learned on Wall Street that you want to be a net seller in a public offering, not a net buyer.

The people who make real money on IPOs got in early — in the private markets — and they're selling to the public on IPO day.

Our next big pre-IPO report comes out Wednesday.

Listen, if SpaceX comes down to my strike zone, I'll absolutely take a look.

But $1.25 to $1.75 trillion is not my strike zone.

The Opportunity Hidden in All This

Here is the part I find most interesting.

If fund managers are deciding which Mag 7 stock to sell to make room for SpaceX, what are they going to pick?

They might sell Google or Amazon, which have had nice runs recently.

Or they might tax-loss harvest by selling their losers — Microsoft or Meta, which have been sold off pretty hard already.

Either way, we could see weakness in some of the best businesses in the world — not because anything is wrong with them, but because everybody is making room for SpaceX.

I always think of it like being on a jet ski when a massive ship goes by.

My son and I go jet skiing a lot.

When the big boats pass, the waves come, and you ride them.

That SpaceX wave might actually give us a better opportunity to buy Microsoft or Meta even cheaper than they are today.

The kind of passion people have for SpaceX right now — I'm not sure it's tied that closely to valuation.

But as the old timers used to say when I worked on Wall Street — it's a bull market.

Anyway, that's all I have for you today.

Have a wonderful day.

I'll see you tomorrow.

“The Buck Stops Here,”