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. Last Updated: 07/27/2016

IPOs Give Easy Profits to Buyers Who Sell Fast




White-collar workers used to fret that if they lost their jobs, they might wind up flipping burgers. Dean Browning is making up for at least part of his lost wages by flipping stocks of newly public companies.


Browning, who until January was a financial executive with a plastics company in Allentown, Pennsylvania, has spent several months of this year buying and quickly re-selling shares of companies offering stock to the public for the first time. He and a growing number of small investors are using a money-making method that until recently excluded people like them and one that even Browning believes will vanish sometime soon.


"I'm not so sure I can make a living doing this," Browning said, sitting in his orderly home office clad in sweatpants and a T-shirt, his dog curled up at his feet. "I don't know how much longer this market is going to exist." Even now, he makes far less than he used to.


So far in 1999, though, an extraordinarily buoyant market for new stocks has made trading them a gateway to a modest amount of unusually easy money. In November, companies raised almost twice as much, $16.9 billion, through first-time sales of stock than in any other month, according to Thomson Financial Securities Data. The average gain in the first day of trading for initial public offerings in November was also the highest ever, at 102 percent.


The 501 initial public offerings, or IPOs, this year have jumped an average of 62 percent on their first day of trading, more than three times the first-day gain in any other year in the 1990s. A dozen quadrupled and 22 more tripled in the first day from the prices at which they were offered to investors.


For stocks to appreciate that fast, they have to change hands rapidly, with some being bought and sold several times a day. That's hardly the sort of buy-and-hold investing that market experts like Byron Wien recommend for most investors. "These people just rent the stocks, they don't own them," said Wien, chief American strategist at Morgan Stanley Dean Witter.


Such startling immediate returns have attracted the attention of individual investors, who are now clamoring for, and getting, a piece of the IPO action and often reselling, or flipping, the shares they buy within days, even hours.


While company insiders are usually barred from selling newly issued shares for a certain period - often six months -outsiders face no such restriction.


So great is the demand that services have sprung up to keep investors posted on the latest IPO news and established brokerage firms are changing their businesses to cater to people who want to use computers to actively trade these and other stocks.


On Wednesday, Merrill Lynch introduced an online stock-trading service that promises investors a chance to buy newly offered shares, but officials of the firm said they were still trying to decide how to deal with customers who flip them, a practice the firm has traditionally frowned on. Other firms, like Charles Schwab, are trying to find ways to get more shares of IPOs into the hands of small investors before the stocks start trading.


Browning said he has bought and sold 20 new offerings this year, never holding one longer than three weeks, through eight online trading accounts at four different brokerage firms.


All that flipping has brought Browning a profit before taxes of more than $30,000, he said, adding that he has made at least $10,000 more this year trading other stocks. That sum falls well short of the $80,000 he earned at his old job, a salary he has found difficult to replace in the Allentown area.


Browning said he has lost money on only three IPOs he has managed to get his hands on, using two computers to constantly monitor the IPO sections of the World Wide Web sites of E*Trade Group and three other online brokerage firms. He is vying with thousands of other investors, usually in an electronic lottery, for as few as 100 shares at a time.


E*Trade and other members of a new breed of electronic brokerage firms, including Wit Capital Group and FBR.com, are using small allocations of IPOs as an enticement to customers. Traditional investment banks have started including these upstarts in distribution of new issues to whet the appetites of individual investors for the stocks they underwrite; the underwriters also have opened up the offerings because managers of some of their client corporations, especially Internet-based companies, insist on making some shares available to investors electronically.


On various electronic message boards and chatrooms dedicated to stock trading, dozens of speculators can be seen exchanging information and strategies for getting shares of companies poised to go public. At least two services have been created this year to cater to these online speculators, offering for a monthly fee to alert them instantly to the latest opportunities.


Richard Mehta, an investor in Sunnyvale, California, estimates that at least 200,000 people are trading initial offerings electronically. He is trying to capitalize on the strong demand by selling a service that notifies people, by e-mail, telephone or beeper, as soon as one of four online brokerage firms posts new information about a planned offering. In two months, more than 200 people have agreed to pay $6 to $9 a month for the service, Mehta said.


"I could see it in my circle of friends," he said. "None of them were into IPO trading, and then, in the last couple of months, six or eight of them are into it."


Investors are drawn by two beliefs, he said. The first is that shares of new stock are inexpensive; the second, and more important, is that they are as close to a sure thing as an investor can find.


"People think there is a very minimal risk in buying 100 shares at $10," Mehta said. "That's the logic people use in the IPO market: 'Hey, I have nothing to lose.'"


What they have to lose, of course, is whatever they invest; stocks can lose their entire value. Wien of Morgan Stanley Dean Witter said that the current mania reminded him of the late 1960s, when a booming market for new stocks and stocks of small companies culminated in a long market downturn.


"Right now, it seems like a sure thing and sure things sometimes continue for a while," Wien said. "But they don't last forever."


Still, the view that prices of brand-new stocks are more likely to rise than fall is not groundless. In fact, that is how investment bankers on Wall Street designed the process.


Traditionally, underwriters tried to determine what mutual-fund managers and other big investors thought a company was worth, then price its shares 15 percent or 20 percent lower. The strategy was to set the stock up to "pop" higher in its first day of trading, a rise expected to make company executives and their new shareholders happy and to create demand for future stock sales.


Stockbrokers distributed shares to their best customers, treating them as a perquisite that should be tucked away, not quickly resold. For individual investors, flipping new shares was a no-no. Brokers made it clear that investors who repeatedly flipped were unlikely to get more.


To reinforce that policy, big brokerage firms, including Merrill Lynch, have in some instances refused to pay commissions to brokers for selling IPO shares if their clients resold the shares too soon. For example, last month Merrill brokers learned that they would be penalized, through the loss of commissions, if their customers were deemed to have flipped shares of TC Pipelines LP. The stock of that Canadian oil-pipeline partnership, which went public on May 28 for $20.50 a share, barely rose above its offering price before sliding downward to close Wednesday at $16.


That's a degree of control that even Merrill can't exert in dealing with online investors. On Wednesday, Merrill introduced its long-anticipated online trading service, with trades costing as little as $29.95. One feature of the new service Merrill is promoting is access to IPOs the firm underwrites. Sometime next year, Merrill plans to hold lotteries that will give online investors a chance to buy 100 shares of IPOs.


"As of now, we don't plan to place any restrictions on when and how you sell" any IPO shares purchased through an online lottery, said Madeline Weinstein, a senior vice president at Merrill. But, she said that plan could change if the firm's brokers object. "This is an issue for us."