The Pleasures and Pitfalls of New Issues

INVESTORS seem to be passionately eager to get in on the hot new issues of stocks that are coming to market for the first time. But before plunging in, examine them closely. Offering prices are often inflated, and companies that are too questionable to win the financial support of blue ribbon underwriters have little trouble finding unexacting sponsors. As one long established underwriter warns: "Anyone who ventures into new issues needs to be rigorously selective. A lot of real junk is being brought to market, and that's scary."

On the other hand, quite a few companies of real substance are selling their issues to the public for the first time. The new issues market is presenting the public with a chance to invest in some youthful companies that are trailblazers in applied technology. Out of such companies will emerge the top growth firms of the 1990s. Again, the key is selectivity, and its importance is shown by the performance statistics.

Getting information about new public issues is not difficult. Some brokerage houses publish weekly calendars of forthcoming offerings. Most brokers subscribe to Investment Dealers' Digest, a weekly that covers the new issues market. The prospective investor should ask his or her broker for the stock's prospectus, the so called red herring, and scrutinize it carefully.

Look for the passage that lays bare the holdings of the top officers of the company that is selling its stock to you. To repeat, if they are unloading a lot of their own shares, you should shun the issue.

Check the prospectus to see that the underwriter of the issue is a well established firm. Even the best underwriters make errors of judgment, but they will not knowingly market the stock of a company that is likely to damage their reputation. Some of the highest quality new issues are brought to market by such blue chip investment firms as Ladenburg Thalmann; Alex. Brown & Sons; and Morgan Stanley. Yet these companies, too, can fall victim to cyclical downturns in the market or unexpected competition from lesser known firms and suddenly find their deals and reputations souring. The bottom line is to be careful not to depend too heavily on any one underwriter.

See who is providing the venture capital financing. Strong backing by venture capital entrepreneurs suggests that the new company has been well groomed to go public and probably has genuine promise. You can breathe easier if the prospectus lists such respected venture capital firms as Kleiner Perkins Caufield & Byers, DSV Partners, Sutter Hill Ventures or Venrock Associates.

Examine the balance sheet in the prospectus. Are the new company's finances strong enough to keep it going even if profits do not meet expectations or, if profit growth is on target, to provide capital for continued expansion? If you don't trust your own judgment on these matters, don't invest in new issues without reliable professional guidance.