If New Stock Offers Beckon, Invest Before Trading Starts

When Saks Fifth Avenue opened on Wall Street last week, investors proved to be very eager shoppers. If you were one of those lucky enough to get your hands on some of the 16 million shares of common stock available at its offering price of $25 a share, today you could have a fatter wallet.

In just one day of trading on the New York Stock Exchanger, share in Saks Holdings Inc., the parent of the luxury retailer, jumped by nearly 40 percent to close at $34.63, up $9.63.

Wall Street has witnessed several hot new issues in the past few months. Last winter, Pixar Studios, which creates computerized animation, went public at $22 and instantly shot to nearly $50.

Internet wonders Netscape and Yahoo! and another high-end retailer, Tiffany & Co., are among the other companies that gave investors tidy first-day profits.

"Unfortunately for small investors, the majority of initial public offerings [IPOs] are not moneymakers if they are not bought at the offering price," says Robert Natale, new issues analyst at Standards & Poor's in New York. "That's the key to these hot stocks - becoming an insider."

As an outsider, you stand little chance of benefiting from the presale offering price. That price is ordinarily reserved for institutional investors, such as mutual funds, which are willing to commit to buying large chunks of stock in advance of the offering. Another small percentage of the common stock is typically made available to the underwriting firm's "best" retail customers.

"The branch manager of an underwriting firm is going to get 500 shares and then they're going to offer them to the biggest commission-generating customers," says Joel Calvo, president of PNC Brokerage Corp. in Pittsburgh. "Usually the best customers are getting 65 shares or something like that - nothing meaningful."

But getting in on the ground floor of many IPOs over time can be meaningful. A Prudential Securities study found that, on average, an IPO bought at the offering price beats the overall market by 10.9 percentage points on the first day. IPOs bought after that only modestly outperform the market for six months. Then they tend to underperform.

Consider Planet Hollywood - the movie-theme restaurant chain that went public recently. An investor buying at the opening trading price, $31, paid $13 above the $18 initial offering price. Today, with shares trading at $26.75, that investor would be a loser.

"In almost every case, the offering price represents the most that the underwriter figures an investor will pay for the stock. In other words, this is what the stock is really worth," says William Smith, president of Renaissance Capital Corp., an institutional money management firm in Greenwich, Conn. "When the stock starts trading openly, nothing underpins a rising price except hype and hope."

So the place to be on an IPO is at the starting line.

But how does one become one of those investors allocated a few dozen shares at the offering price? Investment bankers, who underwrite the new issues, have some advice: The first order of business is to open an account at a firm that often underwrites IPOs.

Second, have an account with one of the more established brokers at the firm. Experts say the best brokers are given the most shares. Finally, establish a business relationship through routine investing in the stock market. As Renaissance's Mr. Smith says, "Business begets business."

It also doesn't hurt to be a prominent person. A few years ago, it was disclosed that then-Speaker of the House Tom Foley (D) of Washington was let in on more than 60 IPOs at the offering price. More than 95 percent of the offerings increased in value in the first day, creating some nice paper profits for a man whose net worth is paltry by Wall Street standards.

Securities Data in New York, which tracks IPOs, says that this spring will have seen an impressive 151 IPOs coming to market. But many analysts say small investors should look elsewhere.

"The expectation levels for these companies are very high, and for that reason they have to perform right out of the gate," says Ryan Jacobs of IPO Value Monitor in New York. "If they don't, their valuations can come down very quickly."

Pixar, which turned heads with its animated effects in the movie "Toy Story," is a case in point. Priced initially at $22, it began trading at $46. With the stock now back to around $22 a share, every investor who stayed in that deal has come out about even.

Louis Ehrenkrantz, a New York investment adviser, offers a final point to ponder: The Dow has risen 700 percent since 1982. If you had bought into every new stock issue since then in equal dollar amounts, at the offering price, the current value of your portfolio would now be down by about 5 percent.