Your broker calls. "I think I've got a new issue you'll be interested in," she says. "We're taking the Super-Duper Stores public. It looks like the stock will come out at $10 and I can put you down for 200 shares. The company's sales have been going through the roof since they started selling those new video telephones and this stock has gotta be an easy triple. What do you say?"
You think about the idea for five seconds and say yes. And why not? It's a new company in a new business with a new product. And, isn't that how fortunes are made? Look at what happened to Microsoft, up 1,000 percent; Federal Express, up 1,160 percent; and Stryker Corp., up 1,800 percent. They were all new issues once.
That's true. And the investors who got in on the ground floor at those companies did very well, indeed. But is it really that easy to make money in new issues?
Unfortunately not, says Porter K. Wheeler, an economist and financial consultant at The Jefferson Group in Washington. Over the long haul, when it comes to IPOs -- initial public offerings -- investors who get in on the ground floor are likely to wind up in the basement, he says.
Wheeler studied the performance of 3,186 IPOs that came to market in the decade of the 1980s. Of that number, only 1,849 issues, or 58 percent, were still trading at the end of the decade. The rest, 1,337 IPOs, or 42 percent, were no longer trading.
The companies that dropped by the wayside did so for many reasons, including mergers, bankruptcies and liquidations.
Of the companies that stayed in business, investors made money on the stocks of 1,056 firms, or 57 percent of them. Investors lost money on 793 stocks, or 43 percent of them.
Thus only about one-third of all the IPOs made any money for investors.
But even that result wasn't much to write home about.
Of the stocks still trading, only about 26 percent have performed better than the general market, when measured against the Standard & Poor's 500.
The results of Wheeler's study did not surprise Allan Hadhazy, a senior analyst at New Issues newsletter in Fort Lauderdale, Fla.
"Most of your IPOs fizzle," Hadhazy said.
Even so, Hadhazy noted, a small number of winning IPOs can turn in such dramatic performances that they make up for the many losers. The IPO portfolio of New Issues newsletter, now about 10 years old, currently shows a total gain of 41 percent, although the gain was about 60 percent before the recent market downturn, Hadhazy said.
Either way, the 10-year return hasn't been very good. But then it wasn't a very good decade for IPOs, Hadhazy added. Many of the IPOs came from computer companies, a field in which the competition was so intense that many firms fell by the wayside, he said.
Wheeler said he has concluded that investors "should use extreme caution" when deciding whether to invest in IPOs. A major reason, he said, is that in some cases "the substantiation of the earnings shown in the selling document is very questionable."
Indeed, the corporate gap between implied promise and probable performance often is so wide, Wheeler suggested, that the SEC should tighten its rules on what it requires to let a company sell stock to the public.
Wheeler, by the way, also handles some research projects for the Investment Partnership Association, a Washington trade association for companies that sell real estate, oil and gas and other kinds of partnerships to investors. The IPA helped fund Wheeler's study of new issues and, in the coming months, Wheeler said, he expects to do a study for the IPA on how partnership investments have turned out.
"The news is not going to be too good," Wheeler predicted.
In any event, the performance of the IPO market is, or should be, of concern to anyone who is seriously interested in the health of U.S. business.
A new stock issue is one of the key routes that young, growing companies can follow to obtain the capital they need to fuel their expansion. If this route is cut off, business development will suffer.
Given the investment risks normally associated with younger companies, and the unfavorable track record of many IPO offerings, it will take a high level of investor confidence in stocks to generate retail participation in new stock offerings. But that confidence has sustained some serious blows in the last several years, including the market crash of October 1987, the mini-crash of October 1989 and the current breathtaking slide in stock prices.
When stocks are in trouble, as they are now, the willingness of investors to put their money into new situations naturally diminishes. Then the IPO market dries up and business starts to choke.
Central Fidelity Banks is fighting back. While short-sellers hammer its stock, the Richmond-based bank is squeezing the short-sellers.
Lewis N. Miller, president of Central Fidelity, says that bank officials began to notice an unusual rise in short-selling last summer. By August, there were 627,000 shares in the short column, and by September, it had climbed to 739,000 shares.
Then, about a week ago, in Dan Dorfman's USA Today column, Tom Barton, a partner in Feshbach Brothers of Palo Alto, Calif., listed Central Fidelity as one of his favorite shorts. The Feshbachs are the nation's most active short-sellers.
In short-selling, an investor borrows stock from a brokerage firm and sells the stock in anticipation of the price falling. If it does fall, the short-seller buys the stock at the lower price, returns the borrowed shares, and pockets the difference between what he got for selling the shares and what he paid for buying them.
Barton said he was looking for the bank to be hit with loan problems. Indeed, the bank had chalked up $42 million in troubled loans by the end of the third quarter and may have more, Miller said.
But the highly rated bank is in a lot better shape than many others. And just a few days ago, the bank tried to send that message to investors by reporting an 8 percent boost in earnings per share for the third quarter and a 7.3 percent boost in per share profits for the first nine months of the year.
Meanwhile, the bank's directors voted to boost the quarterly dividend to 38 cents a share, for a new annual rate of $1.52. It was the second dividend increase this year.
And finally, with the bank's stock at $23.25, down from a high of $34.625 a year ago, the company is going to continue to buy back its own stock, after having already bought back almost $20 million worth of stock in the past three months.
As to Barton's prediction that the Central Fidelity share price would drop to $7, Miller said, "I think that's ridiculous -- and irresponsible."
The selling pressure on Marriott Corp. has been unremitting, as the market continues to slash stocks that have real-estate exposure. Marriott shares fell last week to $8.375, down from $11.125 a week earlier, a drop of almost 25 percent. A year ago, Marriott was at $38.75, which means the company has dropped 78 percent since then.
With 102 million shares outstanding, the market value of Washington's most prominent company has fallen from $3.98 billion to $861 million.
Ethyl Corp. of Richmond is likely to get approval from the Environmental Protection Agency for the HiTec 3000 additive that Ethyl wants to use in its unleaded gas, according to analyst Leonard Bogner of Prudential-Bache Securities. Ethyl claims the additive would boost octane and reduce harmful tail pipe emissions. Opponents claim that the additive contains manganese, a chemical element harmful to humans. The EPA decision is expected next month.
The chances for EPA approval, Bogner said, have been enhanced by events in the Middle East "and this country's new concerns about energy conservation."
If approval is granted, Bogner said, the additive could add 5 cents to 10 cents a share to Ethyl's earnings in 1991 and generate 25 cents to 30 cents a share annually within three years.