Lag in heady new issues hints of market weakness
The new-issue market is watched closely by professional investors for clues it may provide on the future trend of stock prices. When few companies are selling stock to the public for the first time, it suggests they are either unwilling to sell at prices they consider too low or are simply unable to convince an investment banker that their stock can be sold at any price. That was the general market climate before the market began its sharp rise last August.
But a bull market, especially one in which gains have been compressed in the space of only a few months, offers private companies rare opportunities to go public on terms most favorable to them. Consider the experience of 1983.
In January there were six new issues valued at $109 million. But in February and March there were 55, at $1.98 billion. The rush to go public accelerated in the second quarter, when 98 companies sold stock to the public, at $2.9 billion.
This flood of initial public offerings was made possible by a rising market, but it was greatly enhanced by the success of offerings introduced early this year. Take Laser Photonics, Porex Technologies, Guilford Industries, US Health Care Systems, Rehab Hospital Services, and Lasertechnics, all sold in January and February. At current prices, all have risen well over 100 percent.
In fact, 20 of the 25 new issues during that period have risen well above the offering price, with only 5 now selling below. Such prospects of easy money to be made set the stage both for selling companies and prospective buyers. The window was open for companies needing money, the prices were becoming generous, and eager buyers were attracted in droves.
To go back to the significance of the new-issues market as a bellwether, one should be alert to any softening in this market, particularly regarding the price action of a stock after the initial public offering. If a high percentage of new issues continue to go to a premium (rise in price) and stay there, the market could be considered sound, with a rising trend expected.
On the other hand, if the new-issue market, while continuing to crank out a record number of offerings, gives evidence of a growing percentage of issues declining in value from initial offering price, it may spell trouble.
Data compiled by Abrahamsen & Co., a Hoboken, N.J., corporate-finance software firm, shed some light on the 1983 new-issues market. The numbers show that since June 1, out of 56 new offerings, 21 are now selling below the offering price. Of 33 offerings made in May, however, only 6 have failed to go to a premium and stay there.
What does this mean? Are we in for a sharp correction in the market? Since late April the market averages have moved sidewise, with a continued number of new highs among individual stocks, but with an increasing number of favorites sharply down from their 1983 highs. My conclusion is that a market correction, although subtle, has been under way for several weeks. Perhaps it will lack the dramatic climax of two or three days of sharp drops on heavy volume, but it has nevertheless happened.
The cooling off of the new-issues market is one of the classic signs that the market needs a rest. It suggests that there is indeed a limit for the public appetite for companies with names like Burlington Coat Factory, Eagle Computer, Giga-tronics, 1 Potato 2, and El Chico Corporation. While all of these are still at premiums, another group including Activision, Huntingdon Research, Amgen, and Clayton Homes are down an average of 20 percent in just a few weeks.
One can conclude that every period of excessive enthusiasm will draw to a close, often followed by a period of realism if not fear. No one knows what the market will do, or when it will do it, but the recent softness among the new issues is a signal that we face an interruption in the upward course of the market, though not necessarily panic selling.
Such a correction would be considered healthy, in view of the size and speed of the 1982-83 rally, and would set the stage for further advances.
The sharp market rise in response to the speech by Federal Reserve chairman Paul Volcker before Congress adds, for the moment, a new element to the market scene. But if I'm right about the new-issue market showing signs of a lull, there will be some marvelous opportunities in coming months to pick up bargains.