WASHINGTON, September 29, 2017 – At last it’s the wild and wooly last trading day of the month and of Q3 2017. What a boring and rather negative month it’s been for us!
Window-dressing and other geeky trading moves are currently masking Mr. Market’s real intentions. We’ll need to wait and see if the generally favorable Q4 seasonality magically reappears as October launches that quarter in earnest.
After a flurry of activity and decisions Thursday, we’re mostly on autopilot today.
One quick and, apparently, unfortunate move we decided upon Thursday evening was to pick up 100 shares of an oddball IPO now known as PQ Group Holdings (new symbol PQG). It’s a rather large chemical company with substantial U.S. and international business, which is primarily based on its large portfolio of “catalyst” offerings.
For the non-chemists in the audience (a group that includes yours truly), catalysts are substances that make the magic happen when you’re mixing various chemical elements together. This is a substantial business worldwide, and PQG is heavily involved.
A substantial part of this cobbled-together company has roots in a Philadelphia business that traces its roots all the way back to the early 19th century. In other words, the guys and gals involved in this business are not amateurs.
The problem is, the existing company consists of other pieces as well, that were added in or sold off over the last decade or so by the vulture capitalists that bought out the original entity in the early aughties. In the process, of course, they’ve been borrowing plenty of money to play this game, out of which they’ve been paying each other swell dividends for years.
What that means for new investors is that PQG is being launched not only with enough debt that it currently isn’t making a profit. The bulk of the shares after the offering are still owned by the vulture capitalists, who obviously still control the company’s management.
Typically, such a sale happens when the vulture capitalists think they can get rid of more of their shares profitably over time once the shares find a toehold in the market. The question is, once they start pulling back by selling shares, which weakens the stock’s price, will the potential profitability of the firm become obvious? Or will it become more elusive?
PQG was supposed to price within a range of $21-23. But when its final price was offered last night, it was cut quite substantially to $17.50 per share by an underwriting syndicate led by Morgan Stanley and Goldman Sachs.
The big price cut indicated a decided lack of interest in this IPO by the investing public. But it also was a deep enough discount to persuade yours truly to go for a minimal 100 shares on the presumption that the offering price had gone low enough to ensure at least a whisper of an opening pop.
Well, no such luck. Thus far, the shares have crumpled, not popped. Briefly dipping as low as $16.50 after they opened, the shares have gotten as high as $17.44 in active trading, not even catching up with the offer price thus far.
More disconcerting is this simple, well-known fact. In IPOs, the underwriters are legally permitted to “stabilize” the offering’s price for up to 30 days after the shares are offered. On the basis of today’s anemic trading action, we’d guess that the only reason these shares are still close to that $17.50 offer price is that they’re being “stabilized,” which in lay terms means “manipulated.”
Don’t get me wrong. The reason this technique is permitted is that an IPO more or less has to find a comfortable price range in its first 30-90 trading days in the market. There are a lot of pirates out there who’d love to wildly swing a new stock’s price since no one really knows what it’s worth.
It’s the underwriting syndicate’s job, more or less, to price the new shares pretty much fairly based on real value; then offer them a bit below that price if necessary, to offer new investors a chance to catch that beloved first day “pop.”
But, on the other hand, as the new IPO company is the syndicate’s customer in reality, the syndicate also needs to get the highest reasonable price for the shares. After all, the bulk of the money (after hefty fees) goes into the new company’s coffers, and the less is left on the table, the more the newly public company gets.
Sadly, for us and everyone else who picked up shares, the “compromise” final price was tilted more firmly in the direction of PQ Group and not its new shareholders. Only when the syndicate decides to back out of its “stabilization” effort, will we find out what this stock is currently worth. Indications are that it will go lower, alas.
You win some and you lose some in IPOs. This one doesn’t look promising for us.
We’re currently carrying another pair of “sort-of IPOs” that we picked up in quick succession earlier this month. Both are fairly obscure biotechs, but both have new products either close to approval or almost ready to market. By “sort-of IPOs,” we mean “secondaries,” which are not really new offerings but additional shares of an already existing public company.
Typically, these secondaries are offered at a sharp discount from the previous day’s trading activity to encourage investors to buy in to the offering. If the gods are smiling, you can expect at least a modest price increase when trading opens the day after the offering is priced.
In the case of our two biotechs, Insmed, Inc. (INSM) and Portola Pharmaceuticals (PTLA), it’s been a mixed bag so far. Both went up for a couple of days, then rather badly down, as you can feel the syndicate decided rather quickly to end its “stabilization” activities.
Since then, Portola’s shares have tried to recover their $55 per share offering price, but are still off about a buck and a half, currently standing at $53.40 in Friday trading action.
On the other hand, after an equally irritating dip from its $28.50 offering price, Insmed is looking more robust. It is currently trading at nearly $31 per share, which is close to its yearly high of $31.39, achieved just prior to the new offering. That’s roughly an 8 percent gain if it can hold.
Our discount brokerage doesn’t allow us to “flip” IPOs or secondaries, more or less requiring us to hold these shares for 31 days before selling. Since we can’t flip like the rich people at full service houses can, we need to gauge whether we think we’ll still come out on top after those 31 days.
Often we do, although our gain is rarely if ever what the rich guys get on that first day pop. But a profit is a profit, even if it’s a bit of a gamble, which most IPOs and secondaries actually are. Thus, on each IPO we take down, we’re more or less gambling, based on predictive research.
Since we win more often than we lose, we keep doing this. But we do tend to avoid REIT secondaries, which almost always tank due to serious share dilution, leading to a better price for those who did not get into the IPO or secondary.
Thus far, the best of the three IPO/Secondaries we’re currently holding looks to be Insmed. The worst will likely be PQ Group, with Portola somewhere in the middle. But things can change. So we’ll revisit these shares with you on the first day we can exit our positions to see how well our IPO luck/skill holds up. Insmed will be first up, meaning we’ll want to decide whether to sell for a profit or a loss after 31 days, or whether the issue looks juicy enough to hold for further gain.
IPOs and secondaries are a way to juice up your trading spirits during a dull month. If you choose with reasonable skill, you can improve your percentages. But you have to understand that every once in a while, you’ll take a beating. Them’s the breaks.
Have a good weekend.