Rash of new issues hits discount industry - securities

Discount Store News, August 17, 1992 by Neil Nordby

Taking advantage of the nation's economic malaise, discount store concerns continued to "go public" en masse over the last 12 months. Among them: All For A Dollar; Bed, Bath and Beyond; Ben Franklin; Fred's; Men's Wearhouse; Odds & Ends; Rag Shops; ShopKo; Smart & Final; SportsTown; and Stein Mart.

In fact, with the addition of these new issues, the total number of companies in our bi-weekly Discount Store News Stock Index has now swelled to 74--the largest number ever for this index.

If ever there was an industry that can benefit from an economic slowdown, the discount store industry is it. The reason: shoppers are spending less, but when they are buying, they're buying merchandise with moderate to small price tags.

Granted the initial public offering market for discounters isn't ideal, as many recent offerings have had to be scaled back both in price and in number of shares sold. But this is a function of the overall stock market.

Consider some of the following numbers from the initial public offering market nationally: * A record number of new issues hit the Street during the first six months of 1992; * Securities firms posted $3.6 billion in underwriting fees as a result--an 80% jump over year-earlier levels; * Proceeds from initial and secondary offerings netted companies over $42 billion during the first half of the year, which represented nearly a 60% gain over results at this time last year; * IPOs alone generated over $20 billion in proceeds to newly public companies.

But while these numbers seem impressive, and indeed they are, the story behind the numbers reveal some unsettling news for issuers and investors of IPOs: * Half the deals in all of the U.S. were priced below their initial price range; * Fully 1/5 of all proposed deals were postponed altogether due to the steadily weakening stock market and investor's once-insatiable appetite for these offerings on the wane.

This national composite, interestingly enough, reflects the goings on with regards to discount store new issues so far this year. So, with a rash of new issues in the past few months, just which stocks merit closer examination?

Perhaps some excerpts from "One Up On Wall Street," written by ex-Magellan mutual fund manager Peter Lynch, could provide insight to those currently owning discount store stocks or for those contemplating such a move.

1. Big companies have small stock moves, small companies have large moves.

2. Research the size of a company to accurately judge the impact that new store openings will have on the bottom line. A company with 200 stores will not profit nearly as much from the incremental growth that a 50-store operator will see from the same number of new openings.

3. Look for small companies that have proven that their concept is easily copied elsewhere in other markets, or possibly other cities.

4. Be suspicious of companies that are growing at a 50% or especially at a 100% clip per year. Many of these stocks crash and burn when these lofty performances come back to earth.

5. It's better to miss the first moves upward in a stock in order to prove that the company's plans are working out.

6. People can obtain invaluable information from their place of work that Wall Street will not catch on to for months or even years.

7. Moderately fast growers (i.e. companies whose sales and earning growth rates are between 20% and 25% per year) in non-growth industries are ideal investments.

By the way, the Discount Store News Stock Index posted its best two-week performance so far this year (see accompanying stock chart).

In fact, while the Dow danced tantalizingly close to its record high of 3413 by reaching 3395, the DSN Stock Index rocketed to 2192.77, as each discounter in the accompanying table rallied an average of 7.5%.

               Major Indexes
                        Close     Close     Net     Percent
                       7/20/92    8/3/92   Change    Change
Discount Store Index   2048.34   1922.77   144.42     7.05
Dow Jones              3303.00   3395.40    92.40     2.80
Standard & Poor's       413.75    425.09    11.34     2.74
N.Y.S.E. Composite      227.51    233.66     6.15     2.70
Value Line Index        427.40    253.77     6.37     2.57
   Source: Nordby International Inc., Boulder, Colo.