Tuesday, Oct. 14, shortly before 10 a.m.: the broker in charge of a Shearson Loeb Rhoades office in northern New Jersey is holding a raffle. The prize, he tells his 18 assembled brokers, is 25 shares of stock in a company called Genentech. The broker whose name comes up in the hat can sell the shares at their initial public offering price of $35 per share to any cutomer he wants; the others have to buy it on the open market.
It was no small prize. Within minutes after the market opened Tuesday, Genentech's price had soared past $80 per share.
The raffle was but one sign of the latest fad on Wall Street: catching hot new stock issues of companies involved in high technology or energy exploration. Although the new-issue "gold rush" has been going on all year, it reached what could be its zenith this week when Genentech made its public debut.
Genentech, whose business is genetic research, had only $3.4 million in sales last year. Operating earnings were a meager $80,000, or a penny per share.
However, on the day the Shearson stock broker raffled off the 25 shares, investors bid the company up to a net value of $532 million, or 7,900 times earnings.
Although only a small number of investors actually participated in the Genentech offering, many Wall Street analysts are concerned about the atmosphere such an offering creates. It may leave some investors susceptible to other offerings, which will be compared to Genentech.
Mark K. Tavel, director of research for The Value Line Investment Survey, says, "i don't think this is good for the industry or the brokerage firms that underwrite these things. Maybe for the favored customers that is easy money." And, he adds, "This is a sign the market is in a speculative phase; it's not healthy although it doesn't mean the market won't go higher."
And, Monte Gordon, director of research for the billion dollar Dreyfus group of mutual funds agrees. He notes: "We are starting to get some signs that speculative forces are pushing stock valuations out."
This was definitely the case with Genentech. As the following chronology shows, the forces pushing Genentech were strong and emotional.
10:25 a.m.: All the paper work has been completed and the underwriters, Blyth Eastman Paine Webber Inc. and Hambrecht & Quist open up the stock for trading. Some 15 brokerage houses are "market makers," willing to buy or sell the stock. The first trade is at $80 per share, even shocking the underwriters. Notes Joseph Fashano, who is closely involved with the underwriting at Blyth: "When the price opened here it was embarassing. But, there is no way that we can price it higher . . . we really don't like to do this because it results in more unhappy customers."
11 A.M.: The price soars to 85 bid; 89 offered. At this point, says the Shearson broker in northern New Jersey, the market makers are filling the "market" orders. These orders have been placed by individuals who tell their brokers, "I don't care what price is, I just want to own the stock." He says his office placed several of these "unsolicited" orders even though customers knew they might be paying the highest price. They were.
Noon: The price starts to slip, falling to $77 bid, $78 offered. Still, volume is extraordinary and demand appears insatiable, says one broker. At this point, the stock is selling at over 8,000 times earnings. Jennifer Bryne, an analyst at Butcher & Singer, a Philadelphia brokerage house, says she is not surprised by the activity. Ms. Bryne, who follows the companies involved in genetic research, says, "Indications were clear that people were going to bid it up to incredible levels." What is happening, she explains, is that "People are buying a conceptual play in the hopes that it pans out." Genentech is in an excellent position in the industry, she says, but probably won't have a product on the market for at least five years. In the meantime, she says, it will continue to derive its revenues from contract research, which isn't a particularly profitable endeavor.
1 p.m.: The stock price is continuing to ease with the stock now at 76 1/2 bid, 77 offered. By now its clear that not many individuals got stock at the initial offering price. Instead, a lot of institutional clients, those who give the brokers thousands of dollars of commissions each month, flexed their muscles and got some. One institution which reportedly got some of the stock was the New Horizons Fund at Baltimore-based T. Rowe Price. However, John Johnson, a portfolio manager of the fund, which buys young growth companies, refuses to confirm or deny it, noting the fund doesn't have to give out information between reporting periods. Mr. Johnson says, "As I understand it, an institution was luckly if it got a few thousand shares on the underwriting." In fact, he complains that buying stock in a company like Genentech is difficult, since it's hard to buy a lot of shares. The New Horizons Fund has assets of $900 million; so when it commits 1 percent of its funds to one stock, it can cause large waves in a small pond.
In fact, the Securities and Exchange Commission, in a concession to the fund, allows it to withhold disclosing up to 5 percent of its new portfolio commitments from its shareholders -- to protect them from themselves, Johnson says. So shareholders may not find out for a while if they own a piece of Genentech.
2 p.m.: The sell-off in the stock starts to get heavier as the stock dips to has warned investors about taking part in a "greater fool" game. Mr. Tavel of Value Line gives a little perspective on the issue when he notes that the "industry is too new for us to cover." Value Line follows nearly 100 industries.Eventually,. notes Tavel, if the company is successful it will start to produce earnings -- possibly doubling or tripling them each year. "But do you pay 1,000 or 2,000 times earnings for this kind of record?" he asks. And, he adds, "I can't help but think that a lot of other companies have a lot of bright people working on this, too."
3 p.m.: The selling pace quickens with the stock new selling for $74 per share. Mr. Gordon of the Dreyfus Corp. says he believes investors putting their money into Genentech are basically anticipating way in advance. "This could be a large and significant industry," he adds, but "there are large pitfalls between here and there." Looking at the price to earnings multiple, Gordon quips , "It looks like investors are discounting the hereafter."
4 p.m. closing: The stock continues to fall, ending on a sour note at $71 1/4 per share. Even so, the president and a vice-president of the company with nearly 1 million shares each of the company are now worth over $70 million apiece. Other companies involved in the bio-technology also rode the wave, including Neo-Bionics, Enzo-Bio Chem, and Lubrizol, which owns 1,555,200 shares of Genentech. The next day, Wednesday, the stock continues to fall and on Thursday, a story questioning investor's perceptions on the stock appears in the Wall Street Journal, further eroding the price.
In the meantime, Wall Street is getting ready for the public offering of Apple Computer, which makes home computers.Apple, says one broker, should make the activity in Genentech look like a hiccup.