Outlook for the U.S. stock markets and interest rates
1999 Stock Outlook: Review and Update
Outlook for Ex-Soviet Equities
Outlook for Small- and Microcap Sectors
Outlook for Initial Public Offerings
Outlook for Global Stock Markets
Outlook for Initial Public Offerings (IPOs)
Within the time it takes to get to the office, eat lunch, make a few calls, and go home...you could've made more money than most ordinary investors make in a year.
On the same day the S&P 500 made half a percent and the Dow only made a quarter of a percent, a small, unknown company called EBAY shot up 168%...and they did it in only one day.
You see, there's a highly profitable segment of the market where the most successful investors in the world continue to build their fortunes. Most investors never take advantage of it. Many can't...yet the majority simply doesn't know how.
But it's not rocket science. And if you know how to identify these incredible opportunities, you can profit and profit big.
And here's the best part. The profits from companies like these don't stop after your first big gain. In fact, there's a way to profit at least three different times from the same investment. Let me explain:
You see, these newly public companies, or IPOs, have been able to provide some of the smartest investors with unbelievable wealth. And the reason is simple. While some investments can yield gains up to 10% to 20% within a year or two, IPOs can do the same...but a lot quicker. Giving you the opportunity to profit more and faster than with your average investment. Plus, IPOs can allow you to profit one, two, even three times with the same stock...without waiting a couple of years to do it.
(Now granted, for years it has been nearly impossible for individual investors to get in on first-day trading of IPOs. This used to be an area of the market that only big Wall Street institutions could penetrate. But now, due to the increased numbers of IPOs over the last few years, a number of new services are making it possible for individual investors to join in on these first-day profits.)
Now don't get me wrong. Not every IPO will deliver these kinds of gains. In fact, most IPOs usually crash and burn before the end of the year.
But glitz-and-glamour IPOs that sound like instant sure things are not always as dazzling as they seem.
Give this a try: From the following list, pick what you think was the most successful IPO:
1.) Ticketmaster
2.) Abercrombie and Fitch
3.) Cymer
4.) Saks Fifth Avenue
5.) Planet Hollywood
Think you got it? Well the surprise answer is the only one that you've probably never heard of -- Cymer. When finding the big IPO opportunities, remember...big names don't necessarily mean big profits. While Ticketmaster was down 14.2%, Saks was down 22%, Abercrombie was down 28.6%, and Planet Hollywood was down 26.5%...Cymer was up 253%.
The point is, if you know ahead of time that a company is more hype than substance, you'll know how to profit from it.
If an IPO is all hype, and you know that it's all hype, you can jump in on the first day, ride it up and get out before the hype bubble deflates. If an IPO isn't all hype, and you know that there's more that's keeping the stock price on the rise, then you can stick with the company for a while and make a significant profit while doing so.
The best way to understand hype is to understand how and why it is created.
You see, when a company first goes public, it has to set a price. There's really no way to know what the stock is worth, because no one has bought it yet. So underwriters (basically a group of analysts and accountants) try to come up with what they think is an accurate valuation of the stock. Once this price is set, it will either go up or down, depending upon what people will pay for it.
Now obviously, the company wants the stock to go up...and so do the underwriters since they work for the company. So, this is where the hype machine kicks in.
Buy hype can't last forever. And once the hype bubble deflates, the company will either sink or swim. But either way, you can still make a profit. That's the beauty of IPOs.
IPO investing is risky, but it is the potential for big returns that attract investors.
Back in the ring
You probably couldn't help but notice the financial dailies' headlines in October: Pundits everywhere were speaking of an IPO glut. And they had a case:
IPOs enjoy cyclical popularity. Most analysts would agree that 1998 have been a rough year for investors -- and especially for those counting on IPOs.
Just look at the number of companies debuting in the last few years:
In 1995, 314 companies went public. In 1996, there were approximately 467, and in 1997 approximately 340. In 1998, only 253 companies have gone public as of this writing.
But as the year is coming to an end, the market is picking up steam again. We will probably not see much happening as we approach the holidays, but 1999 appears to be a year for the IPO comeback based on debuts in 1998.
The Dow's new high means the revival of IPOs.
Reunited we stand
A few new issues have triggered the new spark in the IPO market. eBay, Inc. (EBAY-NASDAQ). (I recommended eBay in our video, Profit Perspectives 2000, which we produced for the Millennium Society a few weeks ago.) eBay rocked the market on 9/24/98 opening at US$53.50, 197% above its US$18 offer. Earthweb (EWBX - NASDAQ) opened at US$40, 185% above the offer price of US$14. TheGlobe.com (TGLO - NASDAQ) opened at US$90, 900% above the offer price of US$9.
It's these big headlines and profits that are rekindling the flame of fear and greed -- fear of the hoopla and hype of IPOs and the greed for triple digit returns.
While you were sleeping
In a struggling IPO market, there are opportunities to pick up on IPOs or IPOs that have dropped in price in the aftermarket. This is hard to come by for many investors when the IPO market is hot. I'll give you an example.
After its spectacular opening, eBay dropped to a low of US$25.25 in October 1998 -- a great time to buy. eBay is already selling for US$200 -- a nice short-term profit.
This is a perfect example of picking up a great buy in the aftermarket. So, you couldn't get in on an IPO. Well, it's time to stop whining about that and be patient in waiting for a dip in price to get in on a buy.
A company goes public to raise cash for further growth. In 1998, we saw an ailing market. Companies decided to delay and postpone their offerings. Because underwriters need an optimistic market to make money...that's why they're in business in the first place.
Ever wondered why individual investors hardly ever get a chance to buy an IPO at the offer?
As I explained above there are really two rounds of profit making in every IPO. One is the institutional feeding frenzy -- who're escalating the bidding of any new issue...so they can pawn it off at a premium to gullible individuals.
In many cases, the stock cannot sustain the hype...let alone its valuation once it hits the aftermarket. In fact, institutions...who've been bidding up prices...are selling at the top. Demand collapses. Prices fall. And individual investors are left holding the bag. Only the underwriters and institutions have made sure that they cashed out at a nifty profit margin...
But it's this cooling-down period that savvy IPO investors use to buy a few good IPOs on the cheap.
Of course, you need to know what you're doing.
Hot IPOs for 1999
I recommended Netcom Systems (NTCM - NASDAQ) in the August issue of Taipan. Netcom has yet to makes its debut. Remember, a bad market curtails offerings.
Netcom offers network performance measurement systems. New technological applications are being developed and companies are forced to implement these new applications in their existing networks not knowing if they really work.
The demand for high speed and high performance network equipment has increased due to the growth of Internet and Intranet use.
Taking the bugs out
Netcom Systems has developed SmartBits, which evaluates performance, reliability, quality of service and proof of service of networking equipment. SmartBits also generates accurate, customizable, high-speed flows of network traffic for measuring performance criteria.
There are two points I really like about the company. One is its distribution structure. The company markets and sells its products and services through a direct sales force in the United States, Denmark, U.K., France, Ireland, and indirectly through distributors in Canada, China, Germany, Israel, Italy, Japan, Korea, the Netherlands, Sweden, and Taiwan.
But I really like the fact that this company is actually making money.
Revenues grew from US$9 million in 1995 to over US$56 million in 1997 alone. And Netcom has been profitable for the last three fiscal years.
As a matter of fact, the last 13 fiscal quarters' revenues have increased each quarter over the previous quarter. This makes net income margins of nearly 40% in both 1996 and 1997!
There is only one obstacle. Because of bad market conditions, Netcom had filed for a withdrawal of the offer with the Securities Exchange Commission. But Computer Literacy, Inc. (CMPL - NASDAQ) also filed to withdraw, but decided to make its debut on 9/20 because of the revived market. We may or may not see that with Netcom, so keep an eye out for this great buy.
For more information, you can contact Netcom Systems, Inc., 20550 Nordhoff St., Chatsworth, CA 91311, phone: 818-700-5100, fax: 818-709-0827
Diversify your nest egg
Dey, Inc. (DYY-NYSE) is one of the largest U.S. manufacturers of sterile, unit dose inhalation solution products for the treatment of respiratory diseases -- focusing on the development, manufacturing, and marketing of prescription drug products for the treatment of respiratory diseases and respiratory-related allergies.
In 1997, the U.S. market demand for inhalation therapy prescription pharmaceutical products was estimated to have been approximately US$3.4 billion.
Drink, eat, and inhale
In respiratory therapy for lung and airway diseases there are different methods to administer the drugs -- through inhalation, orally in capsule, tablet or liquid form, or through intravenous injection. The primary method of delivering pharmaceuticals to patients with lung or airway diseases is through inhalation.
The most obvious advantages of inhalation therapy are the delivery of the medication directly to the desired site and the rapid onset of effect. The U.S. retail market for inhalation pharmaceuticals used in the treatment of respiratory diseases were estimated to be approximately US$2.8 billion in 1997.
One form of inhalation delivery system, the pressurized gas propellant used in most metered dose inhalers, relies on the use of chlorofluorocarbons (CFS). This method is expected to phase out in the U.S. and will be prohibited as a propellant worldwide in the coming years under international agreements that address concerns about the ozone.
Dey is focusing on the development of dry powder inhalers (DPIs), which are the newest inhalation delivery systems and do not use environmentally harmful propellants. In 1997, the total U.S. market for inhalation pharmaceuticals delivered using DPIs was estimated to be US$930 million, but is expected to grow.
Sniff on this
The Dey/Lipha DPI consists of a patented drug-carrier with multiple, pre-measured individual doses, hermetically sealed, and protected from the environment. This device opens each individual dose compartment and delivers the dose through inspiratory force created by the patient.
There are at least 10 companies worldwide currently involved in the development, marketing, and sales of DPIs for the treatment of respiratory diseases.
There are two types of DPIs currently in commercial use worldwide -- individual dose DPIs and multiple dose DPIs. The Dey/Lipha DPI will be highly competitive.
The Dey/Lipha DPI is designed to deliver drugs to the bronchial tubes and lungs without the need for patient coordination between inhalation and activation of the drug delivery device. The product also has an integral dose-counting mechanism, which displays the quantity of remaining doses in the unit, and indicates to the patients when it is time to get their prescriptions refilled.
No street corner sales
Dey has its own U.S. marketing and distribution network, which markets Dey's products to large institutional purchasers, wholesalers, group purchasing organizations, chain pharmacies, health maintenance organizations, and the list goes on.
Dey markets its products through advertising, promotion, and through its support of consumer advocacy groups. The Company focuses its marketing efforts on three target markets: institutional/retail, managed care, and clinical sales. Dey cleverly focuses sales coverage at multiple levels in the U.S. distribution chain as well as targeting specialty prescibers.
Dey's net sales increased from US$50 million in 1992 to US$220 million in 1997. Net sales increased by 35.9%, from US$52.3 million in the first quarter of 1997 to US$71.1 million in the first quarter of 1998. Net profits have gone from US$38 million in 1995 to US$54 million in 1997 and are on track to break US$65 million in 1998. This is a remarkable 25% bottom line after tax.
That means earnings per share (EPS) will be about US$.74, which at an estimated offering price of US$15 per share would translate into a price/earnings ratio of 20. That is below the industry average and an absolute steal.
Dey has also maintained annual gross margins of between 61.4% and 74.2% through the introduction of new products and by capturing market shares during such periods.
Dey will receive a lot of market coverage since it is a spin-off from the Merck family of drugs. The stock being offered is only a minority interest in the company, so Dey will still be a member of the Merck family of companies. Great news for shareholders, because Dey will receive the same world-wide market attention as Merck.
This will be a great short- and long-term buy. If you miss the offer in late September, wait around a week, and pick up some shares in the aftermarket.
The underwriters are Bear, Stearns & Co. Inc.; Hambrecht & Quist; J.P. Morgan & Co.; Lehman Brothers. For more information, please contact Dey, Inc., 2751 Napa Valley Corporate Dr., Napa, CA 94558; tel.: 877-666-1534; fax: 707-224-9264.
As of my writing, there were only two IPOs recommended in Taipan in 1998 that has actually gone public.
Golden State Vintners (VINT-NSDAQ) came into the public eye on 7/22/98, when the market was ready to take a turn for the worse. The offer was US$17. Since then, the price has been floating in the US$11-12 range.
During the market correction, the price dropped to its low of US$6.88, but has rallied back.
Revenues will continue
to experience seasonal and quarterly fluctuations in its revenues.
Because of the inherent seasonality of its operations, the company
has traditionally reported its highest revenues and net income
in the first and second fiscal quarters.
This remains a buy under US$12.
Foxy lady
Fox Entertainment likes to please the unwashed masses...with movies like The Titanic and T.V. shows like The X-Files. (Alright, I admit, I like to be mesmerized, too.) So how can television networks face continued "sluggish demand and audience erosion" in the fourth quarter following a similarly bleak third period?
The lack of expected viewer audiences
have forced big networks like ABC and NBC to return advertising
revenue to local stations. Looks pretty bleak.
All those former couch potatoes are probably now surfing the net or watching cable. In the first nine weeks of the 1998-99 season, NBC's ratings dropped 15 percent compared to the same period a year earlier. CBS fell 7%, ABC 5%. Even with these network ratings, Fox managed to improve its performance by a single ratings point. It's something.
FOX went public on 9/11/98 at US$22.50, and is currently slightly above its offer price.