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Big Funds Often First Off the Tee for New Issues

September 27, 1993|TOM PETRUNO

The Nasdaq market of small-company stocks is on fire, and Royal Grip is one big reason why. The Scottsdale, Ariz.-based maker of golf club grips sold stock to the public last Wednesday for the first time: One million shares at $12 a piece.

By day's end Thursday, the stock had zoomed to $20.75, providing a 73% one-day return to the lucky investors who bought at $12.

Actually, luck had little to do with who got Royal Grip shares at the offering price. The hunger for new stock issues today is so extraordinary that only Wall Street's best customers are being served--primarily, the biggest stock mutual fund managers.

Mere mortals (i.e., individual investors) are welcome to buy once the stocks begin trading. And perhaps unfortunately for many of those investors, they are doing just that--bidding the stocks up dramatically and thereby allowing the fund managers to unload their shares at a huge profit.

Inevitably, these new-issue booms end with many or most of the stocks crashing to Earth. But for now, demand for fresh stock ideas is hot. And Wall Street, as usual, has no trouble finding private small companies eager to fill that demand by going public.

Through August, 414 companies had made initial public stock offerings this year. So far this month another 30 have joined the rush. And the latest edition of Fort Lauderdale-based New Issues newsletter lists 119 now-private firms planning stock offerings.

Among the most anticipated offerings in the upcoming crop are Burbank-based Iwerks Entertainment, a giant-screen, specialty movie theater builder (it built the "Alfred Hitchcock's Art of Making Movies" attraction at Universal Studios in Orlando); women's clothing star Donna Karan; and Barnes & Noble, the nation's biggest operator of book superstores.

Unquestionably, many of these new-issue candidates are exciting companies in their own right. But money managers' eagerness to grab a piece of the offerings usually has as much to do with competitive performance pressures in the fund business as with the managers' genuine interest in the companies' long-term prospects.

At a time like this, playing new issues "is one of the few games in town where you can beat the market" with reasonable regularity, says Robert Natale, new-issues analyst at Standard & Poor's Corp. in New York.

Think of it this way: If you can finagle a piece of a new offering that has been hyped all over Wall Street, you are almost guaranteed to make a quick profit as the investors closed out of the offering try to buy once the shares trade.

Knowing this, fund managers battle with investment bankers to get in on new-issues deals. Demand thus becomes a self-fulfilling prophecy of sorts.

Moreover, the bankers themselves help fuel the hype by carefully orchestrating the initial pricing of new stocks--often keeping the prices artificially low, to boost the front-line buyers' immediate paper profit. That feeds investors' lust for the next deal--and so on.

Where these cycles frequently reach hyperdrive is in specific industries that become Wall Street darlings for a time. Last spring it was riverboat casinos; now, it's the golf business.

Royal Grip's stock sale last week was just the latest in a series of golf-related new issues that have spawned investor feeding frenzies.

The first golf stock was Carlsbad-based Callaway Golf in February, 1992. Callaway has virtually changed the game in recent years with its innovative oversized clubs, such as its Big Bertha line. The company's sales have rocketed from $10 million in 1989 to $132 million last year.

Its stock, meanwhile, has zoomed from $10 at its initial offering to $57.25 now.

Investors, wide-eyed at Callaway's success, naturally are receptive to any golf-related stock that sounds like "another Callaway."

Hence, the market has gleefully embraced other Carlsbad-area golf companies--from Aldila, which supplies shafts to Callaway; to Charter Golf, which makes golf apparel; to Cobra Golf, which makes oversized clubs that compete directly with Callaway's.

And coming soon to the new-issues market: Club Car, which makes (of course) golf carts.

Are these stocks worth the inflated prices investors have been willing to pay, over and above the initial offering prices?

Maybe. Thanks to aging baby boomers, golf still is a growth industry, though it may be more susceptible to the economy's swings than some investors may realize. The number of players in the United States has risen from 21.2 million in 1987 to 24.8 million last year. But the total is down from a spike of 27.8 million in 1990, according to the National Golf Foundation in Jupiter, Fla.

The biggest question for buyers of golf-related new issues is whether the companies they are betting on have products that will be enduring hits with duffers, or just one-time wonders.

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