This brings back memories... Posted by: Dale Franks
on Tuesday, November 21, 2006
Allen Sloan is concerned that there are signs of frothiness creeping back into the stock market. A couple of recent IPOs have prompted this concern.
We'll do Nymex first, because it's simpler. On Friday, its first day of trading as a public company, the stock closed at $132.99, more than double its initial public offering price of $59. It had traded as high as $150. (It closed Monday at $130.27.) Anytime I see an IPO more than double in a day, I shake my head—and I think of the Internet and telecom and tech stock madness that came upon the market in the late 1990s. We all know how that ended.
I have no idea of what Nymex's true economic value is—but it's hard to believe that the selling shareholders were stupid enough to underprice the issue by more than 50 percent, as the stock market seems to think.
Remember the IPOs for Google, Netscape, and Red Hat? All those tech companies that had never even showed a profit, doubling their IPO price in a single day?
I remember, back in 1999, against my strenuous objections, The Lovely Christine bought into the IPO for Tickets.Com. I begged her not to do it, but a) it was her money and b) she argued, "You don't know everything". As it climbed to 32, I begged her to sell it, to no avail. It's a worthless, crap, penny stock, now, selling at about a buck a share over the counter ("selling" being an interesting term of art, since no one wants to buy it), having been delisted in 2003 for failing to maintain assets of $4 million.
And they still haven't made a profit.
There were a lot of high-profile IPOs that ended up getting pounded from 2001-2003.
When a company goes public, the investment bank handling the IPO is usually very careful to do the due diligence required to come up with an equitable price per share for the IPO. For the market to determine that the share price is undervalued by 50% on the first day of trading is...interesting.
Now, it may be that this IPO is a one-off, because stocks in financial exchanges—NYMEX is the parent company of the NY Mercantile Exchange—are hot right now. The industry is consolidating, so perhaps expectations of future earnings as NYMEX absorbs other exchanges are the justification for an optimistic valuation by investors. But at the current price, a P/E of 88.9 seems...pretty high. Compare and contrast to Nasdaq, which has a PE of 49.7. And, of course, there are no earnings outlooks for the future available yet, so we really have no idea what future earnings are estimated to be.
If it's just a one-off, because investors think that consolidation will markedly increase earnings, well, then, no problem. Even if it turns out to be a pig in poke, well, that's always a risk of IPOs. But, if we begin to see other IPOs show this kind of exuberance, well, then it may be time to start looking at portfolio re-allocation. Stocks, are, after all, cyclical, and it's better to miss hitting the high and go defensive, than it is to get stuck with Tickets.Com.
It has never been customary for IPO’s to be fairly valued. The best rational explanation I have heard is that a company is selling only a small fraction of its stock at IPO, and selling it cheaply is a way of earning market goodwill and drawing an attractive historical price chart for followon issues. [De facto bribery of priveleged investors and major investment bank clients is an alternative hypothesis.]
I remember that in the 1990’s, Goldman Sachs and BT Alex Brown both used to advertise the average gain after IPO of stocks they brought to market, which seems akin to advertising what bad value they got for their clients; but the fact that they chose to publicize it seems to mean that our perception is a minority one.