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Smith calls Net IPOs risky
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December 15, 1998: 12:13 p.m. ET
Renaissance Capital portfolio manager urges caution, looks to fundamentals
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NEW YORK (CNNfn) - In the last two months, two-thirds of Internet-related public offerings increased in value by 100 percent or more in the first day of trading. But beneath the veneer of stunning Internet IPOs this year lies a less- than-stellar performance for IPOs as a whole.
CNNfn spoke with William Smith, president and portfolio manager of Renaissance Capital, about this unpredictable segment of the market and how investors should approach it.
Here is his "Business Day" interview:
JOHN DEFTERIOS, CNNfn ANCHOR: Could you ever have imagined what we have seen in the market in the last two months? Could you have predicted this demand for Internet stocks at all?
WILLIAM SMITH, PRESIDENT, RENAISSANCE CAPITAL CORP.: You know, it really hit most people by surprise at the timing of this, at least if you look back at the history of the Internet stocks: They came out strong, they went down quite a bit and then they're starting to come back again, primarily driven by more people coming online, people using the Internet to access E-commerce types of sites and being much more familiar with these names.
DEFTERIOS: Are you worried that it's becoming more and more like a casino because people want to get in on these first- and second-day gains for the stocks?
SMITH: It's the subject of IPOs that people on the street are talking about every day.
The reason is that nine of the top 10 performing IPOs this year were Internet stocks.
But that doesn't tell the whole story. If you look at it, and we did a study of the IPOs, on average, the Internet "pure play" IPOs were up on average over 150 percent. But if you had looked at and invested from the first day's close going forward until now, they are down 55 percent.
This is a very, very risky area. It's a very risky area for individual investors to get into and this is something that the regulators are also looking into.
DEFTERIOS: In fact, it hasn't been lost on the Nasdaq.
Can they actually regulate this? How would you go about a framework to regulate these trades on the first day?
SMITH: You know, that's what -- I mean, it's certainly creating a lot of uncertainty on the street right now. People aren't sure what would come out of something like this.
And basically the Nasdaq is looking at the first day pops, seeing that… unsophisticated investors are putting open orders in on these IPOs before they come out.
They come out and they're priced at extremely high levels, high premiums, and they don't know what the price is when they first put that order in. And perhaps… instead of having online brokers, where you're just kind of writing in, maybe you have to have a human interface.
But the answers aren't really certain.
DEFTERIOS: Do you support this idea that the Nasdaq should step in, at least put a floor here and a cap at the same time so it doesn't go out of control? I say it because it goes against free market principles, of course.
SMITH: Right. It's, you know, people don't like to see unsophisticated investors hurt, but we are clearly very pro free market and that sort of thing. So it depends on how they implement it is really the main question.
DEFTERIOS: You run an after-market fund which by definition goes back and picks up a number of those stocks that have been left behind. You alluded to this a little bit, but for the IPO market overall, the stocks are actually up six-and-a-half percent if you look at all of them for 1998, and that pales in comparison to the S&P 500. What are you picking up right now?
SMITH: Well, the main ones that we have been focusing on in our portfolio are ones like CompX (CIX), which makes types of ergonomic equipment -- furniture equipment -- for computers. And it has been -- it was really taken down quite a bit when all the furniture equipment was down, but this is really more of a computer play than it is a furniture play.
Another one is Convergys (CVG) which is the spinoff of the billing unit from Cincinnati Bell (CSN). They just recently completed the full spinoff just a few weeks ago.
This is a very, very major company selling at a very reasonable price right now. It's the leader in its field. It does billing -- online billing or on phone billing for the telephone companies.
DEFTERIOS: One final thing. Do you follow, out of curiosity, the companies that Microsoft takes a seed money stake in at a very early stage and watch it grow up and try to take it as an IPO? Does it interest you at all what they're doing?
SMITH: Well, obviously when it comes public, we see if they have an ownership in it. I mean, you see not only the seed money, but you are also seeing people spinoff of individuals that are coming in.
Like for instance this new one, InfoSpace.com has the former manager -- general manager -- of the MS Network… and he's the CEO of the company. 
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