(FORTUNE Magazine) – Today's market for initial public offerings (IPOs) resembles nothing so much as an aircraft carrier launching warplanes into battle. One by one the new stock issues are brought on deck, hooked up, and catapulted into the wild blue yonder. The average new issue in 1993 had climbed 21% by mid-September. Dozens of others had gone supersonic, including the five top guns in the chart on the next page. If all the deals scheduled for the last quarter take place, more than 600 companies will have gone public in 1993, issuing a record total of $34 billion in new stock. Another 123 companies have already registered $6 billion in IPOs with the Securities and Exchange Commission to be issued next year. Can this highflying market stay aloft? The professionals who make their living packaging, selling, and buying IPOs see no near-term reason it can't -- although they all live with the ulcer-inducing certainty that it will eventually flame out. The bull market in IPOs, now closing in on its third birthday, has already surprised them with its staying power. One reason for this market's strength is the crummy outlook for everything else. Long-term bond yields are at historic lows. Prospects for general economic growth -- and hence for many established companies -- are mediocre at best. Where, other than in the new-issues market, can an investor hope to find long-term appreciation? The truly hot IPOs, says Dick Smith, director of syndicates at Montgomery Securities, are those that look as though they guarantee sustained growth. Says he: ''It's apparent that the market will seek those stocks out, pay some pretty snappy prices for them, and continue to pay them as long as the stocks perform.'' The top-performing IPO in this year's crop, Microchip Technology, can wear the growth-stock hat with panache. The company makes the microcontrollers that are embedded in nearly everything electronic these days -- from airbag sensors to CD players to those bathroom faucets that go on automatically when you put your hand under them. Microchip, which went public with a $19.5 million issue in March, specializes in the type of processors most in demand and sells them to everyone from Blaupunkt, the German consumer electronics company, to Whirlpool -- 4,500 customers in all. The average automobile had two in 1980 and 14 in 1990; it should have 35 by 2000, says Microchip chief financial officer Philip Chapman. Or look at Styles on Video. It sells a computer imaging system that lets you preview exactly how you would look with new eyeglasses, or with any one of 600 different combinations of hairstyle and color. ''There's not a woman in the world who wouldn't want to use our service,'' says Chief Executive Guy de Vreese. Styles on Video reported sales of $3.3 million in the first half of 1993. Next product? Weight-loss software to show you how you would look were you to shed, say, ten pounds. The diversity of the companies going public is another reason for the IPO market's continuing strength. In previous cycles, the fate of this market was often tied to a particular industry -- computer hardware one year, biotech the next. By contrast, this year's list reads like a cross-section of modern American capitalism. One-third are manufacturers, and the rest range from real estate investment trusts, banks, and insurance companies to retailers, wholesalers, and restaurateurs. Finally, the average quality of companies issuing new stock is higher today than in years past, the pros say. Some credit for this goes to the SEC, which has clamped down on the kind of fly-by-night penny-stock issues that can give IPOs a bad name. The larger reason is that the market has become dominated by institutional investors. ''Institutions won't buy garbage, and that keeps the underwriters honest,'' says Jay Gottlieb, publisher of the New Issues Outlook newsletter in White Plains, New York. Gottlieb, who's been eyeing IPOs since the Sixties, notes that before 1982 only three new issues were immediately listed on the New York Stock Exchange: Comsat, Ford Motor, and U.S. Steel. This year about 100 IPOs will have made that leap. THE IPO MARKET operates under some mighty peculiar rules. No. 1 is that IPOs are routinely underpriced, so most make a big move upward on the first day they trade. Increases of 10% are common; in today's fervent market, 50% jumps are not unusual. One obvious explanation: Investment bankers can't be certain what the market will bear, so they aim low to make sure they sell the whole issue. Finance professors argue that there are at least two other reasons, says Jay R. Ritter of the University of Illinois. First, investment bankers also deliberately underprice to reward favored investors. The second reason is theoretical: Buyers of IPOs who have superior knowledge of their worth will try to buy only issues that are underpriced. Less well-informed investors will thus tend to wind up with a small share of the most desirable new issues and 100% of the unattractive ones. This is called the winner's curse: They get the shares they ask for only if the best-informed investors don't want them. Faced with this problem of adverse selection, the less-informed investors will be reluctant to buy any IPOs unless, on average, they are underpriced sufficiently to compensate for the risk. Rule No. 2 is that few individual investors get a chance to buy IPOs at the issue price. Since institutions are the kings in this jungle, institutions get the lion's ration of the stock. The lucky individuals who are permitted to buy tend to be the very best customers of the brokers handling the deal -- investors with longstanding relationships, active accounts, and deep pockets. Says a Wall Street executive: ''This is not intended as an exercise in democracy.'' But missing out on that fat first day doesn't mean you can't make smart investments in IPOs. Say you had liked General Nutrition Cos. (it is opening vitamin stores in malls all over America) but were unable to buy at the offering price of $16. You missed out on a quick 38% profit when it rose to $22 in 24 hours. But if you did buy the stock on day two, or a month later when it had fallen back to $20, you'd be feeling pretty good today. On September 17, General Nutrition was trading at $48. REMEMBER that a lot of IPOs crash, as evidenced by the five bottom performers in our chart. Especially vulnerable are high-tech startups with great expectations but scanty near-term profits, like BioSurface Technology. And bear in mind that many of today's highfliers with stratospheric price/ earnings multiples will surely end up disappointing their shareholders. Says Ritter: ''Some of these valuations imply that people think they have identified the next Microsoft. History shows that not many Microsofts come along.'' A few of the interesting IPOs in the pipeline this fall, picked by Gottlieb of New Issues Outlook: Interfilm, a comer in the trendy field of interactive motion pictures -- a cross between movies and video games. Earlier this year the company signed a deal with Sony Pictures. Then there's fashion designer Donna Karan, with a strong past and good growth possibilities. And Gottlieb sees magic in Aladdin Knowledge Systems, a software firm whose primary product prevents unauthorized use of software programs.

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