The anniversary of the Lehman Brothers meltdown is upon us, and with it memories of the seminal event that ushered in the 2008 financial crisis. And while there's been much healing since, some companies have fared better than others.
In one day, when the legendary investment bank said it could no longer meet its obligations and would file for bankruptcy, the Dow plunged more than 500 points, sparking market turmoil that eventually eliminated $7 trillion dollars in value. But that was only the beginning. The bank’s demise also heralded a liquidity crisis, with the threat that banks would not have enough money to meet their most basic obligation to depositors: allowing them to withdraw cash. Credit markets also froze, and small businesses suffered a liquidity crunch that shuttered thousands of companies. As one indication, the Small Business Administration’s loan volumes were sliced in half as banks of all sizes seized up and stopped lending.
Eight years later, all signs point to go. The economy is in recovery, with latest jobs reports signaling a return to more normal employment levels. Housing prices continue to recover, and small businesses are going strong, with increasingly adequate levels of capital.
Still, there’s a real reason for uneasiness today. The stock market has been on unsteady ground in recent weeks, with a precipitous drop in August, which has led some to wonder whether we face stiff tailwinds for the remainder of the year. Namely, the ongoing economic crisis in China is a cause for concern, as are world events like the refugee crisis in Western Europe, and the continuing slide in the price of oil.
How are Inc.'s own entrepreneurial bellwether's handling the turmoil? For the inaugural Founders 40 list, out in April, Inc. showcased some of the fastest growing companies in the U.S. that went public in the last three years. One of the reasons to highlight these particular companies is that the founders still have a direct hand in operations, which many investment advisors and some stock analysts suggest can impact company culture, as well as performance.
A Mixed Performance
Since the latest stock market correction, investor reaction to these mostly founder-led companies has been mixed. Two of the six companies that went public less than a year ago, have shown a dramatic decrease in their stock prices in the past few months, compared to about one third of the 34 in the list who have been public a year or longer.
The two underperforming stocks of the most recent public companies are Box, the cloud data storage company, and alternative finance company Lending Club. Their stock prices have fallen 42 percent and 58 percent respectively since going public in the early part of the year.
(Neither company made a representative available to comment by deadline, although a Lending Club spokeswoman said it had positive earnings per share of 3 cents in the second quarter.)
Both companies are operating at a loss, and it’s likely that investors are losing patience with promising tech companies that don’t turn a profit, according to Mark McComsey, chief investment officer of Beverly Hills Wealth Management, a financial advisory firm catering to high net worth people and entrepreneurs, based in Los Angeles. Many such companies are also victims of the so-called hype cycle, McComsey says.
The hype cycle, as its name implies, puts oversized expectations on a company with a new or promising product that aims to “interrupt” a particular market. These companies can tend to underperform as they’re forced to prove their case to the market, which can take years.
On the plus side, one third of the more recently public companies show stock prices that have gained in value since their IPO. By contrast, nearly a third of the longer term entrants on the list have shown similar gains in their stock prices since this time last year. These callouts include burger chain Shake Shack, health savings account company HealthEquity, advertisement serving platform Rubicon Project, and cybersecurity companies FireyEye and Palo Alto Networks. Natural Grocers by Vitamin Cottage is also a performing well.
The Dow Jones Industrial Average was down in August about 11 percent. However, of the Founders 40 companies whose stock increased in value in the past year, their stocks collectively were up between 7 percent and 55 percent.
Here's how three of Inc.'s Founders 40 companies fared amid the latest stock market decline and their keys for withstanding tough times:
1. Be in the right place at the right time.
FireEye, the network security and hack attack forensic sleuthing company, based in Milpitas, California, has been the go-to company for some of the largest hack attacks the nation has seen in recent year. Among others, there's Sony Entertainment's embarrassing email dump to JP Morgan Chase and Target’s loss of tens of millions of credit card account numbers. Its stock price is up 7 percent compared to a year ago to 38.29--although nowhere near its $95 a share in March 2014.
Chief Executive David DeWalt attributes the strong stock performance to having the right solution the market needs at the right time. “We had a very successful IPO in September 2013, and being a public company has raised our visibility as a leader in the cyber security market,” DeWalt said in an email. “We believe we chose the right time to go public, and have leveraged the capital markets to continue our expansion and market share gains.”
2. Keep your roots central to your message.
The 60-year-old, family owned purveyor of vitamins and organic groceries, Natural Grocers by Vitamin Cottage, has annual sales of more than half-a-billion dollars. And its stock is up nearly 30 percent for the year, though down by a nearly equivalent amount from its March, 2014 high of $35.
The company, which went public in 2012, largely credits its ability to tell a good yarn--a skill particularly useful in the worlds of health food and healthy lifestyles.
“As the market for natural and organic foods and nutritional supplements continues to grow, having a story based on a set of founding principles that have guided us throughout our 60 year history…helps when talking to investors,” Kemper Isley, co-president of the company, and son of the founders Margaret and Philip Isley, said in an email.
Plus, the kind of brand recognition that comes from having close to 100 stores in communities throughout the West and Midwest also helps, says Robert Davis, chief investment officer of Round Table Wealth Management. “The less certainty there is to the story and the outlook, the greater the risk, and that doesn’t price well,” Davis says.
3. Don't neglect your customers, ever.
Health savings accounts may not sound too sexy, but HealthEquity of Draper, Utah has turned them into a torrid business. Its stock has jumped 55 percent in the last year, though it's down 10 percent from its high of $34.56 in June. HealtyEquity went public in July, 2014.
Part of the company's growth stems from its perch within the health-care industry. Not only are health stocks seen as a good hedge against market volatility, interest in the category is growing among consumers. According to company founder and Vice Chairman Steven Neelman, the health account industry is growing at an average rate of 20 percent annually, while his own company has seen its annual revenue increase about 40 percent in recent years.
Neeleman also credits his company's latest performance to its business model. HealthEquity uses a so-called business-to-business-to-consumer model, which allows for distribution of its products through health insurance companies and, by extension, giant companies including Google and American Express. HealthEquity then provides 24-hours-a-day customer service to the employees who purchase the plans. That triangulation, which is common for many HSA providers, has helped the company build its distribution, as well as awareness.
“When we meet with the institutional investors who buy our stock, they want to know about the HSAs, but many don’t have them,” Neeleman says. “When we start to tell the story, they say, ‘We should do this at our firm.’”