New stock issues are risky investments, and one need only consider the recent public offerings of San Fernando Valley companies to understand why.
Shares of most local companies going public during the past 18 months have dropped sharply in price, despite the bull market. Of 10 local stocks recently surveyed, only two--Price Pfister and St. Ives--were above their initial public offering (IPO) prices.
Less Than Stellar
The rest--Alpharel, AME, Delphi Information Systems, Dick Clark Productions, Finest Hour, HemaCare, Republic American and Tekelec--were off an average 24% from their IPO prices as of the close of trading Friday.
To be sure, the Valley issues aren't alone. In past years, studies have shown that stocks tend to dip soon after their initial offering. This year's IPOs generally have lagged behind the overall market, said Paul Simmonds, an analyst with New Issues, a Fort Lauderdale, Fla., newsletter.
Most new issues this year are no more than 5% above or 5% below their IPO prices, Simmonds said. In contrast, the Standard & Poor's 500 composite index and the NASDAQ composite index for the over-the-counter market are up 30% and 26%, respectively, so far this year.
Even a flat showing would be an improvement for most of the Valley IPOs. But with hundreds of new issues coming to market annually, a rush swelled by the bull market, it's no surprise that some IPOs end up to be less than stellar investments.
Last year, 812 companies in the U.S. went public, raising a record $21.4 billion, according to New Issues. The record could fall again this year. In the first eight months of 1987, 500 companies raised $17.9 billion by going public, compared with $12.9 million raised by 531 companies during the same period of 1986.
In a crowd that size, there are always some stocks so speculative that they should never have been sold in the first place. Even if a company's outlook is relatively sound, its new stock could slump for any number of reasons. One common fault is the underwriter--the stock brokerage firm that actually coordinates the sale of stock--pricing the stock too high initially, relative to the company's earnings ability.
Another problem is that many companies only sell about 25% to 35% of their stock to the public, leaving the stock thinly traded and ignored by institutional investors and Wall Street analysts because there is not a lot of it available for purchase.
And, often, a stock does poorly because other IPOs in its industry went sour.
AME Stock Down
Consider AME. The movie post-production company in Burbank went public in April, and its stock is about 15% below its IPO price despite a near doubling of the company's profit in the nine months ended June 30. AME Chairman Andrew McIntyre said the stock is suffering because Wall Street is disappointed with some other television production companies that ran into financial trouble after going public earlier this year.
One of those TV production companies that left investors edgy is Dick Clark Productions in Burbank. The company went public in January at $6.50 a share, but the stock is 30% lower after the company's profit for the nine months ended March 31 tumbled 34%.
"Once people realize that we're earning the dollars we said we'd earn, and the sales are where we said they'd be, then we'll get a better reception," McIntyre said.
Studies have shown that a new stock issue typically outperforms the overall market for about three months, then tends to lag the market over the next nine months, said Robert Natale, who follows IPOs for Standard & Poor's in New York.
One reason for the early gains is that the investment firms underwriting IPOs often try to support the new stock by purchasing shares for their clients or their own accounts, he said.
After three months, that support trails off, Natale said. Simultaneously, management and other insiders of the new public company--which are prohibited, usually for a quarter or two, from selling any of their shares that were not part of the initial offering--become eligible to sell that additional stock. These insider sales help drive the price of the stock down.
How the stock performs thereafter rests largely on how the company performs. Investors, of course, don't like losses.
Just ask Alpharel, a 6-year-old Camarillo maker of optical data-storage devices, which went public in June. The stock has since dropped 30%, which President Clayton Chisum blames largely on the company's $538,000 loss in the quarter ended June 30.
"We had a disappointing second quarter," he said. "But we thought we covered that in the prospectus, that our earnings would fluctuate from quarter to quarter."
Red ink also has hobbled Tekelec, the electronic test-equipment maker in Calabasas. Tekelec's stock is trading at half its IPO price after the company's $178,000 loss in the quarter ended June 30.