IPOs Can Heat Up a Portfolio, or Burn It
If you want to hitch a wild ride on the stock market, consider investing in an IPO, an initial public offering.
It's like riding a bronco. You might get thrown. But you might ride home with the grand prize.
An initial public offering marks the first time a company sells shares of stock to the public. This "going public" comes loaded with both risk and reward.
First, the rewards.
One word: Microsoft. Back in 1986, its owners, including chairman Bill Gates, decided to let the public invest in their company.
They sold shares, which hit the market at about $20 and doubled that year. Adjusting for stock splits, $250 invested at the outset would be worth $10,800 at today's share price near $100.
So, if you can buy into a company on that first day it goes public, your new shares may reap massive profits.
Now, the risk.
Boston Chicken stock shot up 143 percent its first day in 1993.
Sounds succulent, doesn't it? But a stock that cooks like Boston Chicken's can burn later.
Boston Chicken stock hit the market at the current equivalent of about $18 per share.
Now it trades like leftovers, around $25 a share, up less than the average restaurant stock since November 1993.
Obviously, timing is critical to successful IPO investing. But if you think the thrill is worth the risk, this may be the time.
Speculative stocks, such as IPOs, often lag during early stages of a strong stock market, then rush to catch up.
And IPOs have, so far, sat out the current bull market. Some analysts think they're ready to rush.
But be careful. Other analysts think the market itself is ready to fall back, taking IPOs with it.
There are two ways to buy IPOs:
1. Through a full-service broker. This is actually just a way to try to buy an IPO. "It is almost impossible to get in on the initial launching of most IPOs," says Cebra Graves, an analyst at Morningstar Inc. in Chicago.
Stock brokers generally put their best clients in their best IPO deals, and the limited number of an IPO's shares go to them.
So unless your broker owes you a huge favor, you don't stand a chance. Actually, if your broker is pushing an IPO, that might be a signal of poor quality.
You can also pick up an IPO on the secondary market, as original buyers take their profits and unload their shares.
But beware. IPOs often surge on initial euphoria, then subside as cooler heads prevail.
2. Through a mutual fund. This is safer, because an IPO becomes part of a diversified pool of investments, Mr. Graves says.
The question is whether you would want to buy an IPO-linked fund. This year has not been kind to their ilk.
High-tech IPOs, for example, have taken it on the chin.
For the first quarter of 1997, new high-tech offerings totaled $1.2 billion in market value, less than half last year's same period.
Small company stocks "have not done all that well since last summer,' says Robert Natale, who tracks new issues at Standard & Poor's. "So there's just less incentive to buy new companies."
IPOs traditionally do best in a rising market, when investors - and speculators - bid up the prices for a wide range of stocks.
IPOs often outperform the market in their first few months, then typically underperform after that, Mr. Natale says.
So far this year, 153 IPOs have come to market, compared with about 190 through the same period in 1996, according to Richard Peterson, a spokesman for Securities Data Company, Newark, N.J..
For 1997, he expects 500 to 600 IPOs, "with a total valuation somewhere under $50 billion."
In 1996 there were 872 IPOs valued at $50 billion.