WASHINGTON, April 7, 2017 – It’s a big news day today, with President Trump in the midst of his first substantive get-together with China’s top boss, Xi Jinping on Friday—just hours after he bombed the living daylights out of a Syrian airfield suspected of being the origin of the Syrian government’s sarin gas attack on a civilian area.
So far, at least, the markets are doing their thing, trading essentially in neutral again, even as gold—the traditional hedge against international nastiness—is soaring in Friday morning trading action.
But with the market firmly stuck in neutral (in our opinion) we haven’t been doing a lot of trading, except in IPOs, particularly in the tech area, which are starting to surface again after a several month drought.
The good news: the Okta, Inc. IPO (symbol: OKTA) priced Thursday evening at $17 per share, at the top of a pricing range already increased from an earlier estimate of $13-15. The bad news: we didn’t get the shares we requested, a sure sign that this one would be a barn-burner. It was and is. Late Friday morning it opened for trading at $23.56. In fairly wild but typical first-day trading it’s at $23.13 as we write this, up $6.13 from its offering price: a 36.06 percent gain in its first hour as a publicly traded stock.
As we’ve mentioned frequently in this column, the likely reasons we didn’t get the shares requested are approximately two:
Our discount brokerage’s allocation was probably cut to favor the wealthy clients of the underwriters who ponied up the $$ and manpower to take OKTA public.
Those shares remaining with our brokerage were likely more or less doled out to the kind of big money customers the house wants to retain as customers.
In other words, this tech “unicorn” was a “hot” issue with demand greater than supply, so the rich guys and institutions were first in the queue, since no brokerage house wants to lose the customers that Vegas casinos have long called “whales.”
Yours truly is not just ranting without facts. He used to actually be a retail stock broker back in the day. Each office in our full service brokerage’s vast network (including ours) would get an allocation of shares, and the manager would dole them out in terms of broker seniority, and, most importantly, in terms of which brokers generated the kind of commissions that justified the office’s existence; i.e., the older brokers who only courted very wealthy clients.
“Hot” IPOs thus became something of a reward for this heavy-hitting brokers, who’d then dole them out to their most lucrative clients to help keep them in the fold. It was (and is) totally logical for any broker in question to do this, though that makes it no less irritating for the broker and customers who either didn’t get any shares or got very few.
BTW, whenever an IPO was declared “hot” (an official designation), all firms’ brokers were not allowed to get any shares for themselves. That was (and I presume still is) a great rule, in that if brokers knew that a given issue was really hot, they’d snap up every share, even if they had to borrow money to do it, and none would get out to the public.
It’s a yin and yang thing. It’s certainly irritating when you’re closed out of an IPO and when you absolutely know the rich guys are getting the shares, enabling them to get richer. Yet that said, the brokerage firms and/or investment banks are only making a logical decision, favoring the health of the business over all other concerns.
If my firm loses me as a client, big deal. But, say, if they lose a Bill Gates as a client, that could be devastating to the corporate bottom line. In short, that’s capitalism, fans. We’ve seen the alternative, circa 2009-January 2017, so we’ll move along and hope we get a few shares of the next “hot” issue, which we occasionally do.
On the flipside, we’re still doing okay on our purchase of shares in Keysight Tech (KEYS), which are hanging in their from their pricing as a secondary (non-IPO) offering, current up 4.14 percent from what we paid for them.
Even better, earlier this week, we took a chance on a new IPO, Hess Midstream Partners LP (HESM). This is a spinoff from medium-sized (“mid-cap”) oil company Hess (HES), and separates out exploration, drilling and development of oil, natural gas and natural gas liquid resources as well as some transportation of these products, mostly in the U.S. and to a lesser extent abroad.
HESM is a Master Limited Partnership (MLP), which means that capital gains could be limited, but also that it will gradually supply (we hope) a considerably above average dividend, which is a characteristic of both MLPs and REITs (Real Estate Investment Trusts).
All that is generally good news for investors, except for one thing. These MLP IPOs have a nasty habit of sinking, sometimes considerably, from their IPO price rather than popping, like those shares of OKTA just did.
However, HESM was smartly priced up during its current offering, which is often a sign of a pop, so we went for the shares and, surprisingly, got them even though the offering was well received. And… Voilà! The shares popped when they opened for trading Wednesday. We’re currently up 13 percent from the IPO price and, hopefully, can hold that until our broker’s 30-day IPO hold rule expires.
In point of fact, we actually like REITs and MLPs in general, so we may hold this one until it starts dispensing a dividend. But market conditions will dictate that, so we’ll withhold judgment for now.
Aside from the IPO action, plus all the domestic and international news stemming from this very activist new administration in Washington, the market in general is backing and filling, so we’re being cautious about buying too much merchandise at this point.
That’s it for now. Have a great weekend, and we’ll be back next week as trading action dictates.