IPOs, Dirt-Cheap

Wall Street’s giving big bucks away again, so you better go get some. Every few years, when business gets as terrible as it has been, the major brokerages decide to give the little guy a break and entice him back to the casino with some easy money. They don’t give you a free roll of quarters. They can’t comp you with hotel suites or pour you unlimited vodka-and-tonics. They have something better, more lucrative, and certainly sexier: red-hot IPOs, equity deals priced to let you reap huge rewards without much risk at all.

Let’s face it, 2004’s pretty much a bust for almost all of the firms on Wall Street. The Street has had lackluster trading volumes, very little underwriting, and a shortage of big-fee-paying mergers and acquisitions. The only real action’s been in bonds, of all places, in part because interest rates have been erratic enough for good traders to make some great returns by playing the volatility.

But with the year almost over, and the casinos emptier than they’ve been in ages, the major firms have decided that the remaining initial public offerings, the big equity deals in the pipeline, should favor the buyers over the sellers. After an August from hell, the brokers started pricing all the merch so that it would pop immediately, getting the attention of those who had given up on stocks as a place to make quick returns. Those bargain prices, while frustrating for the issuers, who see huge potential gains left on the table, have created instant riches for anyone who “indicates interest,” as it is known in the trade, and “circles” a sizable amount of the newly minted stocks before they’re launched.

The result? We had the biggest and best October for hot deals since 1999—that’s right, since the bubble. But there’s a big difference between then and now. This time around, deals are being priced at a discount relative to demand, causing the stocks to soar quickly to colossal premiums over the offering price, and allowing customers to ring the register immediately for huge gains. The average first-day gain has been close to 10 percent in 2004, a nice bump, and the most recent deals have far exceeded that instant return. Some of the more notable deals, such as two just priced by Goldman Sachs—Shopping.com and DreamWorks Animation—skyrocketed 60 percent and 38 percent, respectively, on their first days of trading. And it’s not like the old days, when you had to do a huge amount of trading to get in on these deals. Today, you do a handful of trades a month, you get a 500-share allocation on the next hot deal, and suddenly you’ve got enough to pay for a trip to the Four Seasons at Nevis, round-trip airfare included.

“We had the biggest and best October for hot deals since 1999—that’s right, since the bubble.”

Of course, not everything’s a matter of good pricing. The demand side of the equation’s gotten pretty strong of late, as a result of a huge accumulation of cash that’s been on the sidelines forever, earning historically low rates. The incredible Google levitation from $85 to $199 in a matter of weeks has startled some formerly comatose buyers into paying attention, too. Google’s bizarre pricing—a hard-to-understand auction with difficult rules to follow and lots of frustrated buyers and sellers—nevertheless created perhaps the single greatest bargain we’ve come across since Microsoft came public in 1986. While no other deal has matched that performance, Google’s IPO got people juiced again.

It’s the brokerages, though, still reeling from the wounds inflicted by both the plaintiffs’ bar and the New York State attorney general, that are generating the serious bargains. They are so afraid of being accused of hoarding the shares for their best customers only—routine bubble practice—that they have allowed many more retail investors than before to get in on the action. Take Build-A-Bear. Credit Suisse First Boston priced this deal for the profitable retailer so generously that anybody could get a decent allocation. BBW promptly soared 25 percent on day one, affording all takers a terrific return. DreamWorks Animation was no different. Coming right on top of the amazing success of Shark Tale, DreamWorks Animation could have been priced in the mid-thirties by Goldman Sachs and still generate lots of interest. Instead, Goldie priced it at $28, a bargain versus the comparative value, Pixar, and customers picked up $10 per share on the first day of trading. It’s still going higher.

Or how about the outstanding gains investors just scored in Shanda Interactive, a Chinese interactive-gaming concern, which Goldman could barely give away at $11? The stock now resides at $31, an astronomical 160 percent return available to any customer of the firm, as interest in the deal was next to nil. To me, that’s a fetching invitation to open an account, do some plain-vanilla business with Goldman, and perhaps get some of the next big deal in the chute: OptionsXpress, expected to price this month. I’ll bet that the IPO for that well-run broker of put and call options will be priced for dynamite returns for retail. Of course, that’s precisely what Goldman wants to do: entice you back to what many now believe is a market rigged for you to lose, not win. Anything that will jump-start a market suffering from fewer and fewer players and anemic volume is worth sacrificing an issuer or two (or three or four) for.

Why haven’t people talked much about the new IPO boom? Why hasn’t the financial press taken notice? I think it’s because the market itself has become such a hated animal. We all pay way too much attention to the financial-scandal follies and the boring same-old same-old techies—Intel, Oracle, Cisco, Sun Micro, Microsoft, Dell—and not nearly enough to the RightNow Technologies or the Volterra Semiconductors, both up more than 100 percent since they came public earlier in the year. Those two companies can’t buy a word of ink despite their fantastic Internet-tracking and mixed-signal chip-sets businesses, respectively. Their cause isn’t helped by research analysts who are afraid to be promotional, lest they be accused of shilling for bankers and be in the crosshairs of the regulators. You just can’t get the pizzazz IPOs formerly generated with these now-silent housemen sitting on their hands instead of pounding the table for new orders.

Still, you can’t give away money this freely without soon attracting some attention. Plus, last week, the Securities and Exchange Commission changed the decades-old rules about pre-IPO publicity. Management can now give interviews ahead of deals, a practice hitherto banned as “gun-jumping,” and brokers can even begin to place ads beyond the deathly post-deal tombstones that never did much good.

My take? You’ve got to get this merchandise while it’s hot. Once word spreads of these eye-popping returns, brokers will go back to their old ways of tight allocations for only the biggest and best customers and less favorable returns for the buyers. If history is a guide, you’ve got two months left, max, before the brokers have too much business to handle, and the pendulum swings back against you. Go call your broker, sell some of those old techies, get some commission dollars under your belt, and get in the queue. The fix is in on Wall Street, and for once, it’s for you, not against you.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Intel.

IPOs, Dirt-Cheap