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March IPOs a mixed bag
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March 23, 1998: 2:16 p.m. ET
Diverse batch of rookie players slated to jazz up narrow pool of new offerings
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NEW YORK (CNNfn) - Leave it to March Madness to charge up emotions with major upsets and Cinderella stories.
But we're not talking about basketball. As the stock markets continue to defy bears' and bulls' expectations, IPOs are performing best of all -- slam-dunking all major indexes, including the Russell 2000.
Even though only four offerings dribbled into the market last week, one of them, Exodus Communications, posted an 84 percent return on its first day of trading Friday, the best first-day gain so far this year.
The first-day run-up in Exodus stock (EXDS) demonstrates the trend of initial offerings in the past several years of posting huge gains on their first day of trading, placing them almost immediately out of reach for the average retail investor. Over the last three years, first-day gains have averaged over 14 percent, up from only 8.5 percent during the previous three-year period.
However, IPOs don't perform much better in the long term. In every year since 1991, the Russell 2000 index has yielded higher returns than the average IPO once the initial pricing euphoria calms down.
To take advantage of this pattern of early soaring gains followed by slower activity afterward, the retail investor who wants to play ball with the IPOs may want to consider adopting a FIFO -- First In, First Out -- policy toward the offerings market.
Another basic in the IPO playbook is to go with leading "coaches," or underwriters, in making your portfolio team picks. Goldman Sachs has been above average at picking market players, with the Goldman starter team up 79 percent this year.
Among the Goldman all-stars for 1998 are Exodus, DoubleClick (DCLK) -- up 97 percent -- and Visual Networks (VNWK) -- up 106 percent.
With those statistics in mind, Goldman's next rookie pick, ISS Group, isn't likely to be a poor player. Part of an emerging computer security industry that protects networks and other computing environments from hackers and other saboteurs, ISS is slated to float 3.4 million shares at $16. The company has grown rapidly, with sales exploding to over $13 million last year from a quarter of a million three years ago.
ISS Group is considered the hottest deal for this week. It's expected to open up $10 higher.
ISS's debut, accompanied by 13 other new issues raising a total of $920 million, picks up the pace for the sluggish offerings market, but this month still is likely to be the slowest March in the last six years.
Surprisingly, this week's largest IPO is also set to be this year's second-largest, behind Waddell & Reed's (WDR) $399 million debut. Friedman, Billings, Ramsey is floating Anthracite Capital, which is set to raise a total of $300 million. The Maryland-based real estate investment trust invests in multi-family, commercial and residential mortgage loans.
"Finally, a fast food packaging that Mother Earth can love!" is the slogan for EarthShell Container, this week's second-largest deal. The expected $250 million offering, priced between $17 and $21, will be led by Salomon Smith Barney. As its name and credo imply, EarthShell makes environmentally friendly disposable packaging products for the food industry, an estimated $8.3 billion market.
Recently, the company signed an agreement to supply no less than 1.8 billion Earthshell Big Mac sandwich containers to McDonald's over the next three years. The company could balloon to $1.9 billion in market capitalization if priced at the midpoint, but has not yet generated any profits in its six years of operations.
Onix Systems, a maker of field measurement instruments, is set to raise $43.5 million. The market for such products is expected to grow at a 14 percent compounded annual rate, bringing total sales to $20 billion by the year 2000. Leading the average, Onix's policy of growth through acquisition has increased its sales by 25 percent and its profits by 89 percent over the last three years.
One possible flaw in the Onix game plan might be the company's dependence on the oil and gas sector, as over 60 percent of its sales come from that industry. With first-quarter earnings for Big Oil expected to drop as much as 40 percent from a year ago, orders for Onix instruments may slow down. 
-- by Bambi Francisco for CNNfn Interactive
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