Man, it's been an incredible ride! If you mark the start of the current bull market from that sweltering August day in 1982 when then-Federal Reserve chairman Paul Volcker unexpectedly cut interest rates after raising the cost of money for nearly four years, then it is fair to say that with only one or two exceptions, the U.S. stock market has gone up for the past 15 years.
But common sense tells us this will all end eventually--and maybe sooner than we care to think. Reason? The market has gotten so expensive that there's basically nothing worthwhile left to invest in at a reasonable price. As a result, we find Wall Street now busily manufacturing new "product" to fill the void. And off the assembly line they've been rolling, the "junk securities" of the Nineties, Wall Street's initial public offerings, or IPOs. Long after this bull market has petered out and the bears have begun to prowl, these dreadful little equities will still be rattling around like bad pennies in various portfolios, constant reminders of the wild excess this century's greatest bull market finally reached.
True, every publicly traded company starts out as an IPO, and in the current bull market there have been a few spectacular successes. Netscape, maker of the most-popular software for the Internet, is one. E-Trade, Inc., the online stock brokerage company, is another.
But for every Netscape or E-Trade there are 20 Ultrafems. That company went public at $12 per share in February 1996, promoting itself to investors on the curious notion that women would use tampons made of plastic. Within three months the stock sold for nearly $40 per share as an Ultrafem frenzy swept Wall Street's institutional money managers. But the fad for the stock was just that, and today Ultrafem sells for less than $10.
More than a few hapless investors will also be stuck with shares in the Great American Back Rub Co. This preposterous company went public in February 1995 at $4 per share and eventually climbed to nearly $6 on the notion that you could make a business out of above-the-belt back rubs in malls across the country. The stock today sells for about 40 cents.
By a wide margin, IPOs have become the most volatile, unpredictable of investments. Remember Pixar Animation Studios, founded by Steve Jobs of Apple Computer fame? The company went public in late 1995 on the strength of a contract to do animated movies for Walt Disney Co. On the first day of trading it leaped from $22 to $49.50 per share. Six months later it was down to $14.
Donna Karan International, Inc. came out at close to $30, propped up by Karan's name and reputation. While she and her partners pocketed $116 million in cash from the deal, the shares have lost 75 percent of their value since the company went public in May 1996.
If it weren't bad enough that IPOs are inherently shaky propositions, you could have one pushed on you by a hard-selling broker who phones you out of the blue ("cold calls" in the Wall Street vernacular) from an IPO mill such as GKN Securities. GKN is currently promoting an IPO for a computer software company named Cross Z International Corp. The company has about $2 million in revenues and close to $5 million in losses. Yet GKN is trying to raise close to $20 million for it in a stock sale.
Outfits such as GKN aren't the only firms peddling such junk. It was white-shoe Goldman Sachs, for example, that tried and failed--twice--to take the money-losing Wired magazine public on financials that indicated the company wasn't complying with some of the covenants in its bank loan agreements.
Privately owned companies normally sell shares to the public for one of two reasons: The founders want to get their start-up capital out of the company (a so-called equity cash-out offering), or, more ominously, the company has run short of cash and can't get a loan.
It is the second type of IPO that magically materializes in the late stages of bull markets. The fact that many of these firms come out and soon double in price means little to anyone but a quick in-and-out speculator. Over the long haul, many more such companies fall apart than go on to prosper.
For example, this past autumn saw the filing of an IPO registration statement by an organization called Franks' Express. A start-up rival for Fed Ex and United Parcel, you think? Actually, Franks' Express is a defunct Colorado candy store seeking to raise $100,000 through an IPO. With that money, the company's current owner, Charles Burton, a one-time stockbroker, hopes to buy himself a new business. The Franks' Express deal is what's known on Wall Street as a "blank check" offering. The company has no assets, no income and no business prospects.
So, how can you avoid getting your pockets picked in this game? The best advice is also the simplest: Don't play. For nearly all IPOs, the big money is made in the first few weeks--sometimes the first few hours--of trading, when professional speculators "flip" them in and out of their portfolios.
If you're not one of the pros, count on being a flippee instead of a flipper. Make sure the company you buy into has something going for it, because you're likely to be stuck with it for longer than you think. Be sure the company has had a record in the marketplace for at least two years. Check out the balance sheet to see if the company has any resources of its own, or if instead, like Blanche Du-Bois, it hopes to depend on the kindness of strangers. If so, don't climb aboard, for that's a streetcar that won't take you to Elysian Fields--now or ever.
You can reach Christopher Byron by e-mail at email@example.com.