New-Stock Boom Will Aid Future
The lowest interest rates in 14 years, a disaster for American savers, are helping to nurture a capital-raising boom for what may be the nation’s next generation of blue chip companies.
The dichotomy of suffering savers and elated entrepreneurs was beautifully illustrated by two seemingly unrelated events this week:
* The average yield on money market mutual funds fell to 4.97%, the first drop below 5% since August, 1977.
* Jenny Craig Inc., the Del Mar-based diet-center chain, raised $74 million by selling stock to the public for the first time. The shares were offered at $21 and have already rocketed 18% to $24.875 on brisk investor demand.
In financial markets, someone often has to lose for someone else to win, at least temporarily. The losers this year have been the savers who’ve kept their money in conservative short-term accounts while yields have plunged.
The winners, meanwhile, have been the stock buyers who’ve bet on renewed economic growth ahead despite the near-recession that still lingers.
What the conservative savers may not immediately understand, however, is that the slide in interest rates should ultimately be to their benefit--if they can look at the big picture.
Lower rates have made stocks a more alluring investment alternative, thus allowing companies such as Jenny Craig to raise billions of dollars via new share offerings. And as those billions are put to work within the companies--expanding the business or paying off debt--the net result is a slowly strengthening American economy.
Savers might wish their money funds were still paying 18% yields, as they did in the early 1980s. But businesses could barely function in that environment, let alone expand.
It’s no coincidence that Japanese businesses mushroomed in size and global influence in the 1970s and 1980s: Extraordinarily low interest rates were the norm in Japan during those decades, providing strong Japanese companies with enviable access to more capital.
Likewise, it is the strong U.S. companies that stand to get stronger as investors turn to stocks again. One common misconception of America’s new-stock boom is that the companies involved are mostly small, high-risk ventures that have somehow persuaded investors to take a flyer.
In fact, many experts say the quality of the companies raising money in the stock market has been exceptionally high this year and remains so.
“The thing that strikes me about this market, more than anything else, is that there appears to be a number of very good companies going public,” says Bob Puff, a veteran money manager with the 20th Century mutual funds in Kansas City, Mo. “We don’t see the trash element creeping into the market.”
The higher-quality names include such firms as BET Holdings, the parent of the 10-year-old--and highly profitable--Black Entertainment TV cable channel; Gaylord Entertainment, which owns the Grand Ole Opry in Nashville, and Vans Inc., the City of Orange-based manufacturer of casual shoes.
What’s more, the quality of the market has been raised by the number of firms going public in “reverse-LBOs.” These are large companies, such as battery maker Duracell and supermarket chain Safeway, that were taken private in leveraged buyouts during the 1980s. After streamlining and reenergizing the businesses, the financiers that bought the companies back then--using lots of borrowed money--now are selling pieces of the firms back to the public.
The stock sales allow the companies to reduce their debt loads, putting them in a better position to compete in the ‘90s. Not every LBO worked out for the best, of course--and neither will all of their new stocks. But the basic attraction of these companies is that many are household names with excellent product lines and growth potential. They aren’t the one-product computer start-up firms that dominated the new-issues market in the early 1980s.
“You could say that the business risk is lower with these (LBO) companies, because they’re so established,” said Beth Cotner, manager of the Kemper Summit stock mutual fund in Chicago.
Overall, 297 private companies have gone public so far this year, raising $18.1 billion, according to Securities Data Co. While some investors view the market as becoming too frothy and speculative, the action pales compared to the number of new offerings floated in the mid-1980s.
In 1983, 686 companies went public. In 1986, the total was 727. With two months remaining, there is virtually no way that the level of activity this year will come close to equaling the mid-’80s boom.
That fact gives new-issues proponents hope that a new cycle of capital formation by young companies is just beginning.
For firms such as Jenny Craig, with its chain of 521 diet centers in 37 states, the capital raised in its stock sale will go toward paying off debt. That should allow the company to put more of its profit back in the business, rather than going toward interest costs. If that helps the company open more diet centers, creating new jobs--well, there’s a tiny part of your economic recovery for America over the next few years.
This isn’t an argument for buying every new stock issue. Historically, in fact, many new issues have turned out to be disasters over the long run--which is why many investors buy these stocks only to resell them in a few weeks, if they make a quick buck.
So don’t misunderstand--you are always taking a big risk buying new stocks. But at the very least, investors and savers alike should take a little comfort in this new equity boom. The best hope for the economy in the long run isn’t tax cuts by the federal government--it’s job creation by the private sector. The fact that enough investors still are willing to take a chance by giving capital to entrepreneurs is a good sign for America.
Some 1991 New Issues
New biotech stocks have gotten most of the publicity this year, but there have been many other new issues that have come to market. Some examples:
IPO Thurs. Pct. Stock price close change BET Holdings $17 $23 5/8 +39% Artisoft 16 21 +31% Vans Inc. 14 18 1/4 +30% Supercuts Inc. 11 14 +27% Gaylord Entertain. 20 1/2 24 5/8 +20% Jenny Craig 21 24 7/8 +18% Body Drama 8 1/2 9 +6% Presley Cos. 10 9 -10% Smart & Final 19 16 5/8 -13% Veterinary Centers 6 4 7/8 -19%
All stocks trade on NYSE except Artisoft, Supercuts, Vans and Body Drama (NASDAQ) and Veterinary Centers (Amex).
Source: New Issues newsletter
