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Small Fry And Ip Os: Not Quite The Impossible Dream

Cover Story


Should an individual play the new-issue market? "Don't even think about it," says Richard B. Hoey, chief economist at Dreyfus Corp. "The ability of individuals to invest in the new-issue market over an extended period of time is very limited."

Yet some individuals do manage to buy the best initial public offerings, says Robert Natale, a new-issues expert at Standard & Poor's Corp. "The majority of [individual] investors won't get a hot deal, but if you are an active trader, you can get some."

Your biggest problem will be getting your hands on hot deals at the issue price. Most of the money in the IPO market is made in the first day of trading. The trick is finding a broker and a firm with access to new-issue allocations. Then you need to generate enough commissions to get your broker to give you some plum IPO allocations.

In selecting a broker, try to open an account with one of the firm's biggest producers, who get most hot issues. You can find out who the big shots are by asking who are members of the chairman's or president's club at the firm. While you may not rate highly with these heavy hitters, top producers sometimes get extra shares for prospecting purposes.

Care and stroking of your broker is crucial. Being a good customer--and that includes doing some non-IPO trading--is the best way to get his attention. Another tactic is to refer clients to the broker, says Dennis P. O'Connor, a former Merrill Lynch & Co. broker.

What firm you choose can also make a difference. While the big retail houses have the richest supply of IPOs, some seasoned IPO investors recommend smaller, regional securities firms that are often members of IPO syndicates. Take Qamar U. Zaman, a hematologist in Cumberland, Md. Out of his five brokers, his most active account is with Wheat, First Securities Inc. The Richmond (Va.) firm is small enough for Zaman's broker to be in close touch with the firm's syndicate department, a big plus in obtaining stock and finding out if a particular IPO is in demand. "My Smith Barney [Shearson Inc.] broker tries to get me stock, but there are so many brokers and so few shares, there is not much to go around."

You may do better with a broker in a major city, since these offices get larger allocations. Other good places are wealthy communities such as Palm Beach, Fla., Greenwich, Conn., and Beverly Hills, Calif.

EASIER WAY. Knowing what issues to buy can be tricky. One surefire warning sign that an IPO is a dog is if an underwriter cuts the price or the number of an IPO's shares, which your broker may know. Another is if a broker calls you with an IPO. IPO pros do their own prospecting, using newsletters and other sources. The IPO Financial Network, a Springfield (N.J.) research service, has a 900 number that tells callers which deals are coming and how they are expected to trade.

An easier way to play the IPO market is to invest weeks to months after the offering. "There are definite buys in the aftermarket," says John E. Fitzgibbon Jr., editor of IPO Aftermarket, published by Lynch, Jones & Ryan. Your safest route, though, is to buy a small-cap fund that invests in IPOs. "We want to find growth companies that we can hold for three years," says Lawrence Auriana, portfolio co-manager of the Kaufman Fund.

Buying into an IPO fund may not seem like much fun compared with buying IPOs directly. But if you don't plan on spending lots of time and money, Hoey's "don't even think about it" advice makes a lot of sense.Leah Nathans Spiro and Phillip L. Zweig in New York

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