New Issue Speculation Is Out of Control

HAS speculation got out of hand on Wall Street? Many Wall Streeters fear that in some areas it has. The stock exchanges, acutely aware of the rising fever in the big bull market, are doing what they can to tamp it. The New York Stock Exchange announced last week that it will tighten up its requirements for getting a stock listed. The American Stock Exchange, for the first time in its history, put a ban on stop orders--automatic orders to sell a stock once it reaches a specified price during a decline--on all round-lot transactions.

The Securities & Exchange Commission, which requires full disclosure of a company's prospects when it floats stock, realizes that this rule has been powerless to check some of the worst speculation. It has issued new restrictions to check advertising by investment advisers suggesting that previous recommendations made a pile of money for their clients, or that they have an infallible formula for beating the market. Sample advice from an ad in the New York Times last week: "Because these low-priced stocks are known only to a few--because they have tremendous future promise--the risk involved has often been called the 'risk of becoming rich!' "

Chances are that the new moves will not seriously restrain some of the giddiest speculation. Wall Street is less worried about speculation in listed stocks--though they, too, have their fast ups and downs--than about the speculation in new issues. Most new offerings first appear on the volatile over-the-counter market, where they are harder to control than on the exchanges. Datamation floated 80,000 shares at 2 in February, now is selling at 12 1/2--even though it was in the red last year. Sealed Air Corp., which offered 100,000 shares at 1 last October, is now selling at 7 3/4 on expectation of the success of its machine to weld plastic. A stock whose name suggests either electronics or technical mystery seems sure to have a jump in price. Among recent new issues, Nytronics has gone from 5 to 13 3/4, Renwell Electronics from 4 to 19, Bristol Dynamics from 7 to 19; Radiatronics, Pneumodynamics and Bell Electronic have all more than doubled. Fast rises are not confined to the " 'tronics." The stock of a company called Mother's Cookie, which came out only seven weeks ago at 15, has had a yeasty rise to 25 1/4.

Many a broker tries to caution his clients about indiscriminate buying of new issues, but finds it hard to cool their ardor. If he advises a client not to buy, the client often goes off to another broker or comes back a week or two later to complain that the stock he had been told was "overpriced" has risen another 10 points.

Few of the buyers of new issues seem to worry about such prudent measuring sticks as price-earnings ratios. Control Data, which hit the over-the-counter market at 1 a few years ago, recently hit 133--or 148 times its expected earnings of 90-c- a share. Some hot-selling companies have never seen anything but red ink. Says one broker: "I can understand a stock selling at 20 times earnings, or 50 or even 100 times earnings--but how do you compute the ratio of a company with no earnings?"

Why do the new issues go so fast? Partially because many new companies float a comparatively small amount of shares (usually 100,000 or less), which can be quickly driven up by even slight demand. New issues also have a built-in rising mechanism because underwriters insist that their offering price have some initial relation to earnings--when they have earnings--or be low enough to compete for investors. Thus, in a high-priced market, they bring them out at prices that look like bargains to many amateur investors. Adds Josephthal & Co.'s Sidney Lurie: "We all know it's ridiculous. But the stock market reflects every human frailty, and the big one right now is greed. Others are fear and stupidity. They'll come a little later."

To postpone that day, many brokers are trying to impose their own controls on wild-eyed investors. They make it hard for the investor to get new issues unless he is a longtime customer. White, Weld & Co.--along with many other top-grade firms--refuses to open new accounts for people who want to buy only new issues. Other firms, such as Merrill Lynch, Pierce, Fenner & Smith, refuse to buy unlisted stocks priced below $2 for customers. The best brokerage firms also require a customer buying a questionable stock to confirm that the stock purchase was unsolicited.

Many investors fail to consider that what rises quickly can as quickly fall; even the newly offered stock of so solid a company as Ford dropped below its issuing price shortly after it came out 5 years ago--and stayed below it for 3 years. For such reasons, many Wall Streeters would like to see more done to curb the speculative fever, lest it bring on a painful shake-out that would harm thousands of small investors and, as in '29, give the Street a bad name that would take years to live down.

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