Smart investment bankers know there are a lot of rubes out there, people who pretend to be poker players who can step away from the table with big winnings, and almost never do.
They deal new stocks like cards in a game, encouraging speculation that's not based on value but on the hope of finding a bigger fool before the music stops.
Do you really want to be that bigger fool? I don't.
The classic case was Krispy Kreme (NYSE:KKD), which the late Mark Haynes of CNBC loved following after the dot-bomb at the turn of the century. Speculators got hold of the stock soon after its IPO, and boosted it to an all-time high of $48.90 in August, 2003, before the music stopped. It's currently at around $8/share, and shows all the life of Gloria Swanson in "Sunset Boulevard." (Still waiting for its closeup.)
But there are other ingenues. Always, other ingenues. And there are still speculators ready to ride them.
The closest analogue to the original Krispy Kreme story is Dunkin Brands (NASDAQ:DNKN), another donut chain. It opened at $25, then went to almost $31 and is currently near $29. Doesn't sound too bad, but we're talking about a P/E of nearly 130. 130!
I know. The story isn't the financials, but the story. But what's the story? A nice cake-y donut, the kind I've eaten all my life. Decent coffee, clean albeit pink stores, and they've been around for years. I remember eating them in Japan back in 1989.
Can they grow? Maybe, but not like Google (NASDAQ:GOOG) or Apple (NASDAQ:AAPL). Donuts just don't scale that way. The story, what there is of it, is that CEO Nigel Travis can do what he did for Papa John's Pizza. (Too bad the guy who made Dunkin's best commercial has passed away.
If they'll take it once, of course, they'll take it again, and this week we had two more, very similar, food-related IPOs.
Chef's Warehouse (NASDAQ:CHEF) sells fancy foods online. This has dot-bomb written all over it. Yes, there are fancy foods worth paying big for, foods that can ship well. (I've seen cheesecake ship well.)
But fancy food doesn't cross borders well. That's not French fois gras on their shelves. It's from the Hudson Valley. You want to pay $80 for four pounds of pistachios? Chef's is basically a distributor, and even management admits that's a low-margin business.
Yet they got a 15% bump from the IPO price. The original price was a PE of 28, based on the most recent quarter. Remember you can buy Apple for a PE of 15.39.
Teavana (TEA) is nearer to my heart. I remember going into their very first store, in Atlanta's Lenox Square mall, back in the 1990s. Tea is a very healthy habit, a real workout for the tastebuds if you'd like to try it, but while I eventually got the habit they were too rich for my blood. Tea can get very expensive. They're up to 150 stores now, many of them in Mexico. (Yes, there are wealthy Mexicans.)
TEA rose 60% on its first day. Its prospects are being compared with those of Green Mountain Coffee (NASDAQ:GMCR), which has just been outstanding. The plan is to triple their store count, and they have margins similar to those of Starbuck's.
But most of the IPO shares are coming from existing shareholders. The big hope is Teavana can increase its online sales and that, as tea drinkers mature, they'll keep coming in to spend big on loose teas. The IPO price assumed a PE of 40, roughly twice that of Google.
Looking for the next Krispy Kreme is a fun game to play, but one day the greater fool won't be there, and you'll plunge back to Earth. Yes, maybe you'll have gotten into a Green Mountain, or even a Starbuck's (NASDAQ:SBUX). But I'd want to know a lot more about management, and results, before taking it as an investment proposition.