IPO market getting frothy

Herb Greenberg

May 03, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

So much for the easy money in initial public offerings. There will be exceptions, such as Duracell, the battery company, which went public yesterday with more shares, and a higher price, than originally expected. Duracell closed at 20 3/4 , up 5 3/4 . That's up about 38 percent from its offering price of $15.

But the market for IPOs, which shifted into high gear about four weeks ago, can be expected to go through a shakeout.

"It can't go on forever" is the way the normally effervescent Sandy Robertson, of San Francisco-based Robertson Stephens & Co., puts it. Robertson, whose firm is a leading underwriter of emerging stocks, recalls that in a 15-minute period the other day he received three phone calls from venture capitalists wondering if he was interested in helping them take companies public. The companies they were calling about weren't really ripe to go public, but the bankers were hoping to sneak them in while the window for new offerings was wide open.

"It's a bad sign if those deals get done, because it ruins it for everybody," Robertson says. He explains that stocks issued in poorly done deals tend to sink rapidly in price.

Rival Dan Case, investment-banking chief for San Francisco-based Hambrecht & Quist, also a big name in the emerging-stock underwriting game, agrees. "The market is clearly showing signs of wear," he says. While he doesn't think the window for new offerings is closing, he notes that "the filter is getting finer, as it should. A natural differentiation process is under way. Some lower-quality companies will stop plans to file, others will file and not get completed, others will be completed at lower prices.

There's still money to be made in the IPO market, but it's no longer easy money," Case said.

MOMENTUM INVESTORS: The trend toward momentum-investing -- buy high, sell higher -- has never been hotter. And it can be a swell strategy as long as the company's expected fundamentals don't suddenly change.

If they do? Well, let's just say you don't want to be the last person to buy the stock before any bad news is disseminated.

Take a look at one of the biggest momentum plays of all since October, Apple Computer, which peaked at 71 in mid-April after hitting a trough of 24 1/4 in October. After the company announced disappointing earnings two weeks ago, its stock immediately dropped 14 percent, only to fall another 14 percent Wednesday, after Apple said that profits for the current quarter aren't likely to meet expectations. The stock closed yesterday at 49.

The Apple debacle says less about Apple's strategy, which appears sound, than it does about the dangers of forgetting the principles of investing and getting caught up in a piggish frenzy.

"Speculation is making new highs and caution, new lows," writes Jim Grant in the latest issue of his New York-based Grant's Interest Rate Review, which is billed as the "Gala Spring Complacency Issue".

"People want to be bullish," he says, adding: "In frothy markets, investors who seem to crave adventure in fact settle for the humdrum. Every new high brings lower prospective rates of return, not higher ones."

SQUEEEZZZZE: The worst nightmare for short-sellers is when a company they've sold short gets a takeover offer at a sharply higher price.

Such was the case twice in the past two weeks when two favorite targets of the bears, Golden Valley Microwave and Intermec, agreed to be acquired. Golden Valley is best-known for its microwave popcorn and Intermec produces bar-code scanners. The short interests were a whopping 10 percent and 25 percent of shares outstanding, respectively. After the offers, Golden Valley soared 50 percent, while Intermec jumped 35 percent.

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