New Stock Issues by Southland Firms Are ‘Priced to Fly’
Despite the back-and-forth market, some investors have made good money playing new stock issues of Southland companies this year.
That is, you’ve made money if you could get your hands on the shares to begin with--which often is no easy task when heavyweight institutional investors are hot for a fast buck in this market.
Irvine-based Advanced Logic Research, a manufacturer of high-performance personal computers, went public on April 11 at $13 a share. The stock has since jumped to $17.50.
Pinkerton Inc., the security services company based in Van Nuys, sold stock for the first time on April 4, at $14 a share. The price now: $17.25.
Making 20% to 35% like that--practically overnight--is every investor’s dream, even if it’s just a paper gain. And in the current sluggish market, Wall Street wants desperately to make important customers’ dreams come true. So the brokerages that are underwriting IPOs, or initial public offerings, are trying harder than ever to make sure the stocks are “priced to fly.”
It works like this: Company X decides to go public and hires a brokerage to pull the deal together. The brokerage solicits big money managers and other institutional investors to see what they’d be willing to pay to own stock in the company, considering its earnings, business outlook and other factors.
The institutional investors have the clout to affect the initial stock price in a major way, because an underwriter typically looks to place 50% or more of the shares with the institutions. That is the quickest way to get a deal done.
The company and its brokerage may believe that the stock should be sold at $16 a share. The institutions may agree that the stock is worth $16. But if they don’t see enough chance for an immediate profit when the stock starts trading, they’re likely to talk the IPO price down to, say, $14. The company thus would receive $2 less per share in capital, which is significant money when you’re talking about selling 2 million or 3 million shares.
Pinkerton is a good example of that haggling. Al Berger, the company’s chief operating officer, said “we certainly felt the company’s value was more in the range of $17 to $18 a share,” or about 13 times estimated 1990 earnings per share. Instead, Pinkerton had to settle for $14 in the IPO, only to watch the stock climb above $17 shortly after it began trading.
Negotiations between the brokerage and the big investors are colored by the market’s mood, which can shift almost daily between bullishness and bearishness. But the bottom line is the same: The big investors want to pay as little as possible for the shares, and they want to feel confident that smaller investors--often closed out of the IPO itself--will bid the shares higher quickly.
Another example: Carson-based Dynasty Classics Corp. The 4-year-old company, which has built a $60-million business marketing all sorts of lighting products to retailers such as Price Club and Sears, went public on May 3 at $11.25 a share. The stock has since jumped to $13.75--a gain of 22% in a week.
Clearly, Dynasty’s underwriters, Salomon Bros. and Morgan Stanley & Co., knew that demand was strong. But they were willing to price the stock so that there was something left on the table for the big investors who bought into the IPO.
Who loses in this game? The company, naturally, may wish that it had been able to sell its shares at $13.75 apiece instead of $11.25 in the IPO. After all, that extra $2.50 a share would have flowed directly to the firm’s coffers.
But IPO companies also admit that there’s value in allowing institutional investors to make that overnight paper profit. Chances are, a young company will have to raise money from those folks again someday, so “it’s not bad to have happy investors,” said David Kirkey, vice president of marketing for Advanced Logic.
A tougher question to answer is: How smart are the investors who are clamoring to get the shares after they begin trading, sending the price up? If you’re paying 20% to 40% over a stock’s IPO price a few days or weeks after the offering, you obviously either see great long-term potential in the stock, or you think the price has further to run over the short term.
The investors who are selling, of course, probably don’t agree on either count. Indeed, even many smaller investors who play the IPO game--getting in at the offering price--do so with the sole intention of getting out fast. Clifford Carper, a veteran broker with Bateman Eichler, Hill Richards Inc. in downtown Los Angeles, figures about half of his IPO clients are short-term traders, or “flippers,” as the underwriters refer to them.
And the sad truth is that IPO stocks often have been great short-term money makers, but as long-term investments they were bombs in the 1980s, on average.
A Forbes magazine study last June found that only 50% of 2,181 IPOs from the previous 10 years were trading for more than their initial prices. And only one-third had outperformed the broad market, as measured by the Standard & Poor’s 500-stock index.
That’s partly a reflection of investors’ dislike of small stocks for most of the 1980s, and their fascination with blue chips. In the 1990s, a lot of smart analysts believe small stocks will stage a comeback, while blue ships will lag. Even so, the performance of IPOs in the 1980s also reflects the inherent riskiness of new companies--and that risk isn’t likely to change in the 1990s.
So if you pick from the IPO tree, you’ve got to pick very carefully.
When an IPO Stumbles: Though Wall Street’s IPO machine may look like a well-oiled profit generator for institutional investors, the truth is the business is as much art as science. Try as they might, brokerages can’t always price IPOs so that they go up and stay up short-term.
One recent Southland issue that is “under water,” or under its IPO price, is Tokos Medical of Santa Ana, which provides home treatment for detection and treatment of early labor in pregnancy. Tokos went public on March 26 at $12 and rose to $13.625. But it has since fallen to $10.
Some analysts said the offering was overpriced from the start, considering that the company is expected to earn just 20 cents a share this year. Tokos’ major problem is that the government hasn’t yet fully sanctioned one of the company’s medical devices. While Tokos waits, sales lag, as the company detailed in its first-quarter report, released April 26.
The stock’s fall has miffed some of the investors who paid $12 a share in the IPO, admits David Dennis, managing director at Donaldson Lufkin & Jenrette Securities in Los Angeles, which co-managed the stock offering for Tokos.
“For people who invested to trade in and out, you do get some complaints,” Dennis said. “But you don’t get complaints from long-term investors. . . . And I still think there a lot of investors out there who are buying growth stocks for the long term.”
Briefly: Shearson Lehman Hutton, in its annual world gold industry survey, predicts the metal will average $395 an ounce this year and $410 in 1991. Political and economic worries--especially over the future of Europe--will keep gold from any steep plunge, the brokerage says. Near-term gold futures closed Tuesday at $370 on the New York Commodity Exchange, so even if Shearson’s right, gold’s potential doesn’t look very exciting. . . . Don’t hold out a lot of hope, but some Southland S&L; stocks are staging a mini-rally. HomeFed of San Diego closed at $29.625 Tuesday, up $1 for the day and up $2.50 since May 1. Glenfed Inc. has climbed to $14.375 from just under $12 in mid-April. The stocks are reacting to expectations of lower interest rates ahead, but you’d still be hard-pressed to find a money manager who believes investors are ready to rush into these stocks again. . . . First Boston Corp.’s index of 349 junk bonds shows the average junk issue lost 0.49% of its principal value in April. Figuring an interest return of 0.91% for the month, the average total return was a positive 0.42%.
TRACKING NEW STOCKS
How some 1990 initial public offerings of Southland companies have fared so far:
IPO IPO Tues. Pct. Stock price date close chng. Advanced Logic $13 4/11 $17 1/2 +35% Pinkerton 14 4/04 17 1/4 +23% Dynasty Classics 11 1/4 5/03 13 3/4 +22% Digital Sound 8 1/2 2/26 9 3/8 +10% Wahlco Environ. 13 4/25 14 1/8 +9% Stor 8 5/04 7 7/8 -2% Tokos Medical 12 3/26 10 -17%
