IPO profits highest on 1st trading day 80% of returns made on initial turnover in 1996, study finds

Small investors beware

Big institutions gain most from short-term buying of shares


NEW YORK -- Last year's initial public stock sales, among the riskiest of investments, generated 80 percent of investors' profit for the year the first time they traded, a new study has found.

A review by Birinyi Associates Inc. of 1996's record $59.5 billion in initial public offerings showed that the stocks generated $7.99 billion of profit for investors, with $6.43 billion coming from the first trade.

The report provides fresh evidence that investors who profit most from IPOs -- at least in the short term -- are those that get in on the ground floor. Brokers sell most shares in IPOs at their initial price to financial institutions and wealthy investors -- customers who generate lots of fees.

The study is a warning to small investors that the risk in IPOs goes beyond a company's business prospects to include the likelihood of paying an inflated price, analysts said.

"The lesson here is that you should be a big institution" if you expect to make money short-term buying shares in IPOs, said Travis Farr, an analyst for Renaissance Capital Corp., a Greenwich, Conn. firm that researches IPOs for money managers.

Birinyi Associates, the Greenwich market research firm headed by Laszlo Birinyi, calculated the profit from each 1996 IPO by taking the price of each stock at year's end and subtracting the initial price. The researchers then took that difference in price and multiplied by the number of shares. The firm also calculated initial profits by using the difference between each sale's offering price and the stock's price at the first trade.

"We wanted to determine the true numbers and try to get a handle on where the money is made," said Jeffrey Rubin, a market analyst at Birinyi.

Other analysts agree with the firm's conclusions.

Renaissance Capital said last year's IPOs returned an average 20 percent to investors, assuming stocks were purchased at the initial offering prices. In 1995, when Netscape Communications Corp. was among a pack of high-flying IPOs, new stocks returned 41 percent.

Overall, the 1996 IPOs showed an 18 percent gain on the first day of trading, meaning that the vast majority of the profit was made the first day, Renaissance Capital said.

For small investors, "that would leave very little in the area of after-market returns," said Jay Ritter, a professor of finance at the University of Florida in Gainesville.

For example, Planet Hollywood International Inc., an Orlando, Fla.-based restaurant company whose 1996 IPO received a lot of publicity, sold 10.8 million shares at $18 each.

The shares jumped to $31 when they started trading April 19. Those who bought shares at the offer price and sold immediately pocketed a 72 percent profit.

Other investors could have bought shares on the first day of trading at prices ranging from nearly $25 the day's low, to $32.125, its high. Planet Hollywood's stock closed Friday at $17.625.

Even those investors who bought shares at the first-day low and held the shares for, say, a month -- and managed to sell at the intraday high of $26.375 on May 20 -- would have earned a modest 5.6 percent. By comparison, the Nasdaq Composite Index rose 9.6 percent in the same period.

Worth keeping

To be sure, some IPOs are worth buying and holding. The nation's biggest and best public companies all had to start with an initial sale.

And last year, Cymer Inc., which makes lasers used in producing semiconductor chips, sold 3.34 million shares at $9.50 each. The stock opened at $12.75 Sept. 19 and finished the day at $13.625. Cymer shares now fetch $50 -- an increase of more than fivefold from the offer price.

"There aren't a lot of stocks that double and quadruple in the small-cap area," said Stefan Cobb, a money manager at $7 billion-asset Sirach Capital Management in Seattle. "You want to make sure, when that occurs, you're involved."

The first big IPO of 1997, Vail Resorts Inc., is expected this week. The Colorado ski resort and stockholders plan to sell 10.5 million shares at $19 to $21 each to raise as much as $220.5 million.

In addition, Circuit City's Car-Max has scheduled a first-time stock sale this week. The electronics retailer plans to sell 18.9 million shares at $15 to $17 each, raising as much as $321.3 million for the operator of used-car retail centers.

Pub Date: 2/03/97

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