Interesting read:
NEW YORK, Dec 12 (Reuters) - Early good cheer filled the initial public offering market last week as new issues shot higher, but puzzled industry watchers were unable to explain the lofty valuations and large market capitalizations for firms with little revenue.
"People are buying stocks for the wrong reasons. The IPO market is out of control," said Ricky Harrington, the technical analyst and senior vice president at Wachovia Securities in Charlotte. N.C.
Securities and Exchange Commission Chairman Arthur Levitt also expressed caution in a speech given late last week, warning people against investing in IPOs. He said the risk of losing money in the long run outweighed the allure of sharp initial gains. He added that investors who made IPOs a pillar of their investment strategy were taking an unwarranted risk.
The warnings have done little to cool the IPO market as investors have opted to take the risk rather than miss out on the next big money-making idea.
The speculative sentiment seems to have powered VA Linux Systems Inc. to 239-1/4, or about 700 percent, from its IPO debut at $30 a share. With the huge jump, it holds the record for the largest first-day percentage gain.
Business-to-business online auctioneer FreeMarkets Inc. ended its first day as a public firm at 280, after its $48-a-share IPO. It had a market capitalization of $9.5 billion at the closing price, with near 34 million shares outstanding. For the year ended 1998, it posted net sales of $7.8 million.
Industry players attributed the phenomenon to strong growth projections and having little to base their valuations on as emerging markets developed.
Richard Babson, chairman and president of Babson-United Investment Advisors Inc. in Watertown, Mass. said IPO mania is often driven by the "greater fool" theory.
"'I may be foolish for buying today,' the theory goes, 'but I think there's someone who might be more foolish than me tomorrow," Babson said.
Despite the influx of large IPOs, analysts said there is still plenty of available money to boost more issues.
"People are putting money into technology and are going overweight. They are nervous about it, but it's the only group that is working," said Steven DeSanctis, small-cap stock analyst at Prudential Securities.
This week's calendar does not offer many big-name deals, but it is busy nonetheless as companies try to get to market before the end of the year.
Industry watchers expect Internet greeting card firm EGreetings Network Inc. and Metamor Worldwide Inc.'s e-business services unit Xpedior Inc. to grab the market's attention.
"It will be a strong week next week but certainly not yielding the kind of results that we've seen over the earlier part of this month," said David Menlow, president of IPOfinancial.com in Millburn, N.J. "Next year we're going to get more than our fill of hot stocks, because the underwriters now start to think they are bulletproof."
Given the recent lofty market, there is nothing to suggest that IPOs will cool off in the coming year, said Tim Newell, a managing director at E*Offering.
((--Wall Street Desk (212) 859-1730))
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