If you wonder what it's like to run a company that's had one of the worst-performing initial public offerings of the year, just ask Colin Dyne.
In January, Dyne sold the public shares in the downtown Los Angeles firm he built: Tag-It Pacific Inc., a maker of shopping bags, eyeglass cases and leather and paper tags for the likes of Guess and Kenneth Cole. Investors bought a 50% stake in the company, purchasing 1.7 million shares at $4 each, raising $6.7 million.
But Tag-It now has the dubious distinction of being one of the 10 worst-performing IPOs among California-based firms, its stock down 61% last week from its Jan. 22 offering price, according to CommScan, a New York data firm. The stock closed unchanged Friday at $1.56 on the American Stock Exchange.
Tag-It's stock took a nose dive just months after the IPO when it disappointed Wall Street by reporting less-than-expected first-quarter results. The stock still hasn't recovered, although the shares gained about 12% last week after the company posted an increase in new orders from well-known designers and a profit for the second quarter.
"Business is good. We're poised to grow--we've got our financing in place, a New York office and new contracts," said Dyne, the chief executive of Tag-It, which has 75 employees in Los Angeles and 250 in Mexico. Dyne says these days he is trying not to focus too much on stock market movements and is considering several mergers or acquisitions.
"But we're really taking a beating. This is a long-term deal, and I told investors that on the road show," he said.
Tag-It reported revenue of $3.5 million for the first quarter, compared with $4.3 million for the same period a year ago. It reported a loss of $70,263, compared with a loss of $46,901 for the same time last year.
The "slippage in revenue," as Dyne called it, was due to seasonal fluctuations typical for companies involved in the garment industry and part of the company's transition into a "one-stop shop" for the specialty product needs of designers. Dyne cited new orders from clients such as Tommy Hilfiger and Armani Exchange and said the company has an order backlog of $5.2 million, compared with the $2.7 million it had during the first quarter.
But those first-quarter numbers have troubled analysts such as Elizabeth Pierce, who follows the company for Irvine-based Cruttenden Roth Inc., the underwriter of Tag-It's IPO, who downgraded the stock in June to a "buy" from a "strong buy."
Dyne criticized Cruttenden Roth for "not doing much to support the stock after the IPO."
Byron Roth, chairman of Cruttenden, said that given current market conditions, small companies with a small volume of stock outstanding simply can't afford to have a disappointing quarter right after an IPO.
"The market is 100% 'show me money!' today," Roth said. "If you miss that first quarter, no matter what any underwriter in the world can do for you, investors are going to sell. It's very difficult. It takes a long time to get out of the penalty box."
That's why even when Tag-It reported its first quarterly profit ever on Wednesday of $107,796, or 3 cents a share, the stock price got a good bounce, especially during a week of market turmoil, but failed to even move back above $2.
Still, Dyne said he doesn't regret going public, since the IPO, along with a recent line of credit from Sanwa Bank, helped his company get out from under a financing method known as factoring. A common type of financing in the garment industry, factoring allows companies to borrow money, at high interest rates of 25% or more, on receivables not yet collected.
To be sure, Dyne's Tag-It is hardly the only IPO to have trouble this year. In fact, the market troubles of Tag-It illustrate a point well-known to sophisticated investors: Most IPOs never become stellar market performers.
More than half of all U.S. initial public offerings in 1998 have lost money. Of 339 initial stock sales this year, 186 were trading below their initial issue price as of Thursday's market close, according to CommScan, a financial data firm in New York.
California deals haven't fared much better. Of the 58 IPOs from California-based companies this year, 27 deals, or 47%, are trading below the offering price, according to CommScan.
Last week, several companies expected to go public were delayed or pulled because of the market turmoil. The Dow Jones industrial average fell 299 points Tuesday, its biggest decline since the Oct. 27 rout that closed U.S. trading. And the Russell 2,000 index of small-company stocks has fallen nearly 20%--the mark of an official bear market--since its April high.
In fact, of the 25 IPOs expected to be priced nationwide last week, only a handful were trading by Friday, according to research firm Securities Data.