The market for initial public offerings of stock may be overheating -- again.
Strong demand for small-company stocks by mutual funds and other investors has pushed share prices to dizzying heights on many IPOs, despite a record $39 billion raised by first-time stock issues in 1992.
Responding to the favorable market, new companies have planned a slew of first-time stock issues this month. But another surge of IPOs may push down prices in a market that has become too pricey, money managers warn.
Restaurant and biotechnology stocks have been among the top performers. Retired basketball star Wilt Chamberlain even got into the game last week, selling shares in his restaurant company, which owns a single diner in Boca Raton, Fla.
"I think this is a very dangerous signal there's a lot of speculation going on. An individual would be better off buying a lottery ticket than investing in these companies," said Bradlee Perry, chairman of David L. Babson & Co. in Cambridge, Mass., which manages $5.5 billion in assets.
The IPO market, by nature, is one of booms and busts. Companies selling their first shares of stock are typically risky ventures, and they are so small that stock prices are very sensitive to changing investor demand.
Today's IPO market is getting an extra jolt. With giants such as IBM Corp. struggling, everyone is searching for the next generation of success stories.
"I think this country is reinventing itself," said Roy McKay, portfolio manager of the $900 million Scudder Development Fund. "What's happening is as the capital flows out of IBM and other big companies -- we're talking billions of dollars -- it's going into the exciting, small growth stocks."
IPOs were on a roller coaster ride in 1992. Sales were up sharply in the first quarter; 170 companies sold $11.1 billion in new stock, according to Securities Data Corp. After languishing last summer, activity roared back in the fourth quarter, when 159 companies sold $9.1 billion in stock.
This year, Wall Street bankers have filled the pipeline with IPO filings. Securities Data said more than 50 IPOs have been scheduled for sale this month, matching December's strong sales.
Fueling future sales are the sizzling prices on the 1992 issues.
Casino Magic's stock has been trading at about five times its initial $5-a-share offering price in October, on the expectation that newly built casinos will win big. The stock price of Lone Star Steakhouse & Saloon, a restaurant chain with a Texas theme, has more than doubled since the offering last March.
In the broader IPO market, prices are almost as high as they were in the hot market a year ago. More than 90 percent of IPOs sold in the fourth quarter were trading above their initial offering price in January, according to one Wall Street firm.
Still, some investment pros are urging caution.
"I'm getting so many [prospectuses] across my desk I can't look at them all. We're at a period where you have to be very careful about investing in the new issues," said Barbara Friedman, manager of Loomis Sayles' small stock mutual fund.
Some investors believe restaurants are among the riskiest IPOs.
"Anything with steakhouse in the name . . . is up to 40 or 50 times earnings," said Robert Stovall, president of Stovall Twenty-First Advisers, which has more than $1 billion under management. "I think there's a lot of risk in them, but they all look good when they're going up," he said.