Southland IPOs a Flourishing Crop Despite Risks
In an otherwise difficult stock market, a surprising number of private Southland companies are finding willing buyers for their initial public share offerings.
On Thursday, despite another dive on Wall Street, San Diego-based health care management firm FPA Medical Management went public by selling 1.3 million shares at $10 each. Over the past week, Los Angeles companies coming to market have included linen retailer Strouds Inc., which sold 3.3 million shares at $12.50 each, and Sports Club Co., which sold 4.6 million shares at $9 a piece.
In fact, a tally of initial public offerings (IPOs) by Securities Data Co. shows that, since July 1, nine of the 15 new California stock issues hitting the market have been from Southland companies.
That’s a reversal of the longstanding trend, in which Northern California issues dominate the IPO list because of the usually heavy flow of stock deals out of Silicon Valley. For 1994 to date, for example, 52% of the state’s IPOs have been from companies based north of Santa Barbara. In 1993, the North had 56% of the total offerings.
The proliferation of Southland IPOs is unquestionably a positive development for the local economy. By issuing stock, young companies like Strouds and Sports Club get the cash they need to grow, which often translates into job creation. Sports Club, for instance, will use some of the net $38 million it raised to open new Spectrum Club fitness facilities in Northridge and Glendale.
Protection One, a Culver City-based security alarm monitoring service, will use most of the approximately $16 million its September IPO raised to pay off debt, giving the firm more financial flexibility to expand through acquisitions of smaller security companies.
Among Southland IPOs due in the near future: Burbank-based industrial pump maker Haskel International, “VCR Plus” developer Gemstar International in Pasadena, and Dove Audio, a Beverly Hills-based firm that is the publisher of the new book on Nicole Brown Simpson’s life.
The question for investors, of course, is whether these new stocks are of high enough quality to provide a reasonable chance of decent price appreciation. So far this year, results are mixed.
Investors in Variflex, a Moorpark manufacturer of roller skates and skateboards, have seen their shares rocket 42% from the offering price of $15.50 on June 17. Owners of Dominguez Hills educational-games maker Educational Insights, on the other hand, have lost 38% of their money if they bought at the $10 offering price on April 15.
Naturally, the 1994 Southland IPO crop’s performance so far may say little about the companies’ long-term prospects. Even so, some pros warn individual investors to be careful about virtually any IPO being pitched by brokers today.
Five years into the bull market that began in October, 1990, we’re at the point in the IPO cycle where new offerings are likely to be of significantly higher risk than those of two or three years ago, says Samuel Stewart Jr., a veteran stock picker at Wasatch Advisors in Salt Lake City.
In a bull market, Stewart says, the top-quality IPOs always hit the market early. As the bull ages, “You tend to get poorer-quality companies at unattractive prices,” he says. While he isn’t ready to call the start of a bear market, “We’re clearly in the second half of the IPO cycle” for this bull market, Stewart says. One sign of that, he says, is that he is increasingly getting IPO phone solicitations from “a lot of (brokerages) that I don’t recognize and don’t usually do business with.”
The size and experience level of IPO brokerage underwriters is always important, but never more so than in a dicey stock market, Wall Streeters note. A stock that isn’t well launched or well supported by its underwriter can quickly flounder after hitting the market, aggravating its new investors and embarrassing the company.
Michael DiCarlo, manager of the John Hancock Special Equities stock fund in Boston, says that regardless of the general market mood, “It’s not a good sign” if a new stock quickly drops below its IPO price after the offering. While underwriters often blame a weak market backdrop in such cases, DiCarlo says, “It may be that the stock was mispriced in the first place, or it was put in the wrong hands”--too many institutional owners, for example, and not enough individuals.
Still, despite their blanket warning about buying IPOs today, both Stewart and DiCarlo note that every issue must be judged on its own merits. But given where we are in the IPO cycle, a high level of skepticism may be a good ally.
Southland New Issues
How some 1994 Southland initial public stock offerings have fared in price since their launches.
IPO Thurs. Pct. Stock (market) price price change Thermolase (A) $6 $8 5/8 +44% Variflex (O) 15 1/2 22 +42 Sirena Apparel (O) 4 3/4 5 1/2 +16 Petco Animal (O) 15 1/2 17 1/2 +13 Reliance Steel (N) 14 1/2 14 1/2 -- Strouds (O) 12 1/2 12 1/8 -3 Sports Club (A) 9 8 3/4 -3 Protection One (O) 6 1/2 6 1/4 -4 Hi-Shear Tech. (A) 5 4 1/8 -18 Educ. Insights (O) 10 6 1/4 -38
A: Amex; O: Nasdaq; N: NYSE
Source: Securities Data Co.
