John and Jane Q. Public and Initial Public Offerings
Every morning before 7 a.m., Joyce Randolph calls her broker to ask if Aspec Technology, the Sunnyvale, Calif., circuit designer, will be selling its first shares of stock to the public yet.
The 60-year-old Los Angeles retiree has what she thinks is a winning investment strategy: Buy an initial public offering, or IPO, on the first day, watch the stock price climb, as it often will, then “flip” the stock--meaning she sells it a few days or even a few hours later.
Randolph has already made money this year, she says, on such companies as Rambus Inc., which designs technology that speeds communication among computer chips. Mountain View, Calif.-based Rambus went public May 14 at $12 a share and by the close of trading that day had more than doubled, to $30.25.
But there’s one problem with Randolph’s strategy: She, like most individual investors, can’t get in early on a really hot IPO.
“It’s basically impossible,” she said. “You need accounts with every underwriter to get in. The underwriters save the best stocks for their best customers.”
And without friends in the know at the latest Silicon Valley start-up or contacts at the Wall Street firms that take companies public, Randolph finds herself at a distinct disadvantage.
David Menlow, president of IPO Financial Network Corp., a New Jersey stock tracker, agrees, pointing out that the majority of IPO buyers are large mutual funds and other institutional investors.
“If people think the IPO market often plays favorites with information and stock distribution, they’re right,” he said. “This uneven advantage is the biggest contributor to investors’ feeling uncomfortable with one of the most lucrative areas of the stock market.”
Individual investors “don’t understand the rules of the game,” he said. “This is an environment that has always been relegated to institutions. IPOs have been the ‘thank you for doing business with me’ type of deal.”
In fact, Menlow has a list of 10 mistakes commonly made by individuals who want to be IPO investors.
They are: using only a discount broker; not buying companies’ subsequent stock offerings; not dealing with the right broker; not having enough accounts; not knowing the requirements to do business with an IPO broker; not holding IPOs long enough; not doing any research; waiting too long to place an indication of interest; not establishing a trading plan; and, finally, not recognizing the power of money.
Nonetheless, with big money to be made in initial public offerings, which often see the biggest stock price gains in the first few days of trading, many ma-and-pa investors are interested in making bets in the risky but potentially lucrative world of first-time stock offerings.
To get that chance, individual investors need to plan ahead. Menlow, who gives workshops on how to buy IPOs, advises that as soon as investors hear that a company has filed its IPO registration statement--either through word-of-mouth, a newspaper or an IPO tracking service--they can contact the Securities and Exchange Commission to obtain a copy.
It’s also helpful to have a brokerage account with the lead investment banking firm selling the IPO, but that is certainly no guarantee, he said.
“You can’t just open up an account with every firm just to buy one IPO. You’ve got to show them you are a real player,” Menlow said. “Brokers can, in fact, at their complete discretion, decide whether to give you the stock. Just because you’re dealing with a broker at Merrill [Lynch] doesn’t mean you’re going to get a Merrill IPO.”
When designer fashion firm Polo Ralph Lauren went public with a $767-million offering in May, brokers at Charles Schwab & Co. in San Francisco were able to offer some shares because the discount brokerage had received a block of them to sell. Then it had the tough job of figuring out which of its clients would get an opportunity to buy the highly awaited IPO.
“We called clients we thought might be interested, and 100% were interested,” said Schwab director and trader Brian Muir. He said Schwab is trying to figure out equitable ways, such as offering a lottery, for investors to get a piece of IPOs.
“We looked at people we thought might be interested, like if they already owned retail stocks,” Muir said. “We offered it to our more active trader clients.”
Polo Ralph Lauren stock closed up 21% at $31.50 a share in its first day of trading.
Say an individual does manage to get a piece of the IPO action?
“Many IPOs have kind of a winner’s curse: If you are able to get one, it’s probably not going to be hot,” said Iowa State University business professor Richard B. Carter, who has just completed a study titled “Underwriter Reputation, Initial Returns and the Long-Run Performance of IPO Stocks.”
“Generally, if an underwriter gives you a good IPO, you’re probably a good client, and they in return expect you to buy some IPOs that aren’t so great,” he said.
The reality, though, is that in their first few years, more initial public offerings do poorly than well.
Over a three-year period, IPO stocks on average under-performed stocks of firms that didn’t sell any new securities by 7.4% annually, according to a 1995 study by Jay Ritter, an economics professor at University of Florida.
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Times staff writer Debora Vrana can be reached at debora.vrana@latimes.com
