Tuesday, March 08, 2005


In case you don't know, companies issue stock for the first time when they think they can get the most for it. If you started a successful company you would not want to sell shares unless you could get a lot for them. When the market for new shares gets hot, it is amazing how much the market will pay.

The problem is that for every successful purchase of IPO shares, there must be scores of unsuccessful buys. The persons who bought in early on all big companies you can name probably made a small fortune. Examples are easy to find. The buyer of General Motors in 1919 made 2,200 percent in less than 10 years. The buyer of Microsoft made about 25,000 percent in 16 years. The buyer of Yahoo, April 12, 1996 doubled his money the first day and after adjusting for splits holds shares selling for $33 for which he paid $1.38, about 2300%. The Amazon buyer in 1997 has $1.50 per share basis in a $35 stock,also about 2300%. Buying a market leader seems easy in hindsight. I am getting old and my mind is blank but with just a little research, I could name hundreds of IPO's that went busted. Many of these names you would not recognize.

Some of the IPO's are successful for a very long time but then flame out later. Krispy Kreme is an example. By the way, rumor has it that Warren Buffet may buy shares in Krispy Kreme. I must digress to repeat the story of Warren Buffet and USAir. In 1989, USAir was in financial trouble (this sounds like an airline stock story already). The company needed to raise cash and the banks said no way. Mr. Buffet cut a deal. I don't remember the exact terms but the common stock was selling for about $20 per share and paid no dividend. Warren purchased 358 million dollars of preferred stock paying 9.25%. The purchase price was something like $21 per share. The preferred shares gave Warren three huge advantages over the common share buyer. The 9.25% dividend was not a small consideration. Even better, the preferred put Warren in front of the common shareholders in the event of bankruptcy. Best of all, the preferred was convertible to common at par! Warren Buffet could hardly lose (in one of his annual reports to shareholders he told how close he came to taking a substantial loss on the stock).

I don't remember the exact dates but during the recession of 1991, USAir almost went bankrupt. The stock traded between 3 and 5 dollars a share for a long time. Around that time, Warren cashed out a very profitable deal with Solomon Brothers and to reduce his tax hit he wrote down his investment in USAir. The write off by Buffet was reported widely and a lot of folks believed that Buffet had sold his USAir at a huge loss. Some of the Buffet copy-cats who purchased the common for $20 were sorely disappointed and sold their shares for around $3. I remember some of this story very well because I told several brokers that the write off was a paper entry only but they sold their stock anyway. One broker in particular screamed at me, what difference did it make, Buffet had lost all his money anyway.

I watched the stock carefully and when it broke out above $6 I purchased shares. About 5 or 6 years later, I sold my shares and a soon thereafter it was announced that Warren had converted and sold his shares. At the time of the announcement I believe the price was around $61 and I believe the peak price was around $65 (you many know the stock has filed bankruptcy twice in the past 3 years).

I did not make the maximum off the stock but I'd take a dozen more trades like that one. The point is that it takes a long time to turn around a troubled business and sometimes the business may need to cut a deal or two to survive. In the current cycle, the airlines have been in trouble three and a half years. Several have gotten their costs under control and revenue miles are growing at a steady pace. The problems in the airline business are closer to the end than to the beginning and I have purchased shares in four carriers.

Krispy Kreme still has a long way to go. If Warren Buffet makes a deal, including a high dividend security backed with company assets, I will not be in a rush to buy common shares that do not offer those substantial benefits. On the other hand, if Buffet buys, it will serve as a signal to me that Krispy Kreme is a stock to watch. My confidence in the companies survival as a public company will have been boosted.

Vonage is the fast growing internet phone company. It has taken the lead and will fight Comcast Time-Warner and many others in its attempt to remain the market leader. The business is ready to explode. Vonage has 400,000 subscribers who all save considerable sums relative to their former phone costs. We have reached the 1% on the product life cycle S-Curve and the next 10 years will see dramatic growth.

The current relatively small group of owners and the underwriters are eager to bring the stock public. The day the stock trades publicly is the day the founder is an instant Billionaire and it is the day huge checks are written to the underwriters.
These folks are not foolish. They have already been waiting a couple of years. They are waiting for a "hot" stock market. The excitement is building. Stocks have been doing well for three years but not to the point of being a "hot" market.

I plan to buy shares. I just made a ridiculous statement in the eyes of many because the number of shares or the price has not been determined. However, I have used the product for a year or so. I have signed up my Mom, Brother and Sister. We are all enjoying savings and extra services. The competition is fierce but Vonage has lead the way so far. I am willing to bet that the company is a fast grower for years to come. It is a speculation that I am willing to make with a set amount of dollars.

Ironically, I will start to pull back from my aggressive investment stance after the I purchase the Vonage shares. For a time after the purchase, other companies will look cheap relative to Vonage. In truth, in a "hot" market, most stocks are no longer cheap. When Vonage says, SHOW ME THE MONEY, I am likely to invest, but I will give up a number of other stocks about that time and say SHOW ME THE MONEY!