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Here is what may happen to Ancor.
Investor Interest In Secondaries Growing
Full Coverage
Stock Markets
By Cal Mankowski
NEW YORK (Reuters) - Investors who may be annoyed that their broker cannot get them a piece of the latest hot IPO, or initial public offering, might want to take a look at secondary stock deals.
Long a bit of a backwater in the securities markets, the new interest in large offerings of stock in already public companies is linked to the revival of the small-cap and micro-cap sectors, says money manager Bob Kern.
''Historically, when secondaries were announced, it meant increased supply and (the company's) stock came under pressure,'' Kern said in an interview. ''The secondary was done at a price lower than when the secondary was first announced.''
But consider the case of Emulex Corp. (Nasdaq:EMLX - news). When the Costa Mesa, Calif.-based developer and supplier of products that aid data storage announced a public offering of 2.1 million shares in April, the stock was trading in the 30's. The deal priced the stock at $61 a share. Since then, the stock has climbed above $100. It rose 1-7/8 to 105-1/8 Friday, on a day when the Nasdaq Composite index set yet another record, ending at 2,793.07, up 21.21 points, or 0.77 percent.
A similar pattern was seen in secondary deals for HI/FN Inc., a Los Gatos, Calif.-based semiconductor company, and Realty Information Group Inc., a Bethesda, Md.-based commercial real estate information service provider. Friday, HI/FN gained 1/2 to 69-5/8, compared with the price of the secondary offering at 33. And Realty Information, also up 1/2, was at 46, compared with the price of the secondary at 34-1/2.
Kern argues that one of the reasons fund managers have been cool toward smaller stocks is the difficulty of buying or selling the shares in quantity without affecting the price. But now institutional investors have come to embrace the secondary as a way to buy the stock in size.
When public companies sell more stock in the public market, the deals are sometimes referred to as ''follow-on'' deals.
Kern believes the turnaround for small stocks in the second quarter could really set the stage for a significant reallocation of funds ''down market.'' Even a modest reallocation could bring big gains in the stocks.
Kern, who has been investing in small stocks for 30 years, runs Kern Capital Management LLC. The company is outside adviser to two mutual funds in the Fremont Funds group.
The Fremont U.S. Micro-Cap Fund was up 31.1 percent in the second quarter of 1999 in the retail component and up 32.8 percent in its institutional component. The Fremont U.S. Small- Cap Fund was up 17.5 percent. The Micro-Cap Fund has about $320 million in assets and the Small-Cap Fund has nearly $20 million.
Data from Lipper Inc., a Reuters company, shows small-cap stock funds up 15.6 percent for the second quarter, micro-cap funds up 22.0 percent, and mid-cap funds up 12.5 percent. Growth funds were up 7.1 percent. Stock funds embracing all categories were up 10.2 percent.
With more than 5,000 micro-cap stocks in the $10 million to $580 million market-capitalization range (share price times shares outstanding) and another 1,000-plus small caps in the $580 million to $2.7 billion market-cap range, Kern concedes it's more expensive to do the research to sort out the good and the bad. And there are bad companies in the lowest tiers that will not be around a year from now, he agrees. By contrast, the 122 large-cap companies with more than $19.3 billion in market capitalization each have grown that big because they have a history of being successful businesses. The breakdown from large caps to microcaps cited by Kern is based on figures from Market Guide Stockquest.
How do Kern and his team find the right small and micro-cap stocks to buy? For one thing, he is passing up the ''dot-com'' stocks altogether.
''We are investing in the Internet primarily through the 'enablers','' he said, which means companies that have the broadband technologies for faster Internet access or that specialize in such areas as encryption and compression.
A basic strategy at Kern is to avoid ''me-too'' companies with nothing special, unique or innovative in their product or service. Instead, the focus is on the sectors of technology, health care, consumer products and the broad area of services where the innovation is greatest. Although innovation is also taking place in the financial, energy and transportation sectors, Kern argues that it is at a much lower level and he generally looks for special situations in those areas.
Friday, the Dow Jones industrial average and the S&P 500 index also closed at record highs. The Dow rose 66.81 points, or 0.60 percent, to end at a record 11,193.70. For the holiday-shortened week, the Dow was up 54 points. The S&P 500 index added 8.86 points, or 0.64 percent, to close at a record 1,403.28. |
