For the professionals, the new issue market provides a fertile field for growth investment for the simple reason that it is by far less exploited.

Along with a host of new issues of dubious merit, there are many enterprises of high financial standing which happen to "go public" late. Some of the greatest capital gain opportunities have been made in these long-established situations as well as in brand new companies which show special promise in new product development.

The risks involved in investing in new companies are at least as big as their profit potential. In addition to the usual business risks, they are further aggravated by unavoidable frauds. It's well known that many a new stock issue was put out for no other purpose than to make a fast buck. Too many new companies have failed through inexperience, overextension of resources, bad judgment, or through a combination of these factors. Many should never have been started in the first place.

You must remember that early-stage companies are unseasoned issues which the market has yet to properly appraise. The inevitable result is that they tend to fluctuate widely in price in contrast to seasoned issues which have settled down to a comparatively stable level after many years of trading.

You may have heard how a couple of engineers or scientists started their new companies with nothing but a few ideas in a garage or basement shop. There is, of course, nothing wrong with starting a business in a garage. Many great American firms started that way and many more will. But it seems a little too risky for beginning investors to bet their hard-earned savings on such ventures at the cost of, say, $3 or $5 per share out of 100,000, 200,000 or 300,000 shares of ownership which would be worth little except money raised through the stock issue.

Too many inexperienced investors indulge themselves in dreams of buying into a brand new company with a shiny, bright modern plant complete with equipment, machinery and laboratories, scarcely realizing that the new company they are buying into has little in the way of physical assets which could conceivably be divided into shares.

People bet on all kinds of things—horses, lottery tickets, heavyweight fights. Then why not on new companies, so long as they know what they are betting against? The fact of the matter is, of course, they don't know. Too many new companies cannot make the grade for one reason or another despite the vast prosperity of recent years. However innocent the cause, the sequel is bankruptcy or some form of corporate recapitalization, with generally little left for the original equity owners.

Professionals are in the habit of warning beginners away from little-known stocks, especially from those which are just coming to the market. What beginners should buy, they say, are only leaders—issues which are dominating factors in their respective industry groups.

For the average beginner, leaders may be just the thing. The investor, however, who is willing to spend some time on the subject (and he certainly should if he wants to put hard-earned money into the best possible situations) shouldn't write off unseasoned stocks. What professionals usually forget to tell beginners is that some, if not all, of the greatest profit-making opportunities often come from that direction.

The rewards for those who know how to buy new securities can be large. Well-chosen new issues usually do considerably better, percentagewise, than their blue-chip brothers of the respective field.

The accompanying table lists companies which have gone public only recently. They are picked mainly because of available information. However, since they are among the well-known new issues, they tend to be favored by the market, with the less well-known and less favored ones neglected. While practically all tabulated issues have shown rather substantial or even spectacular gains during one period, as shown in the 3-27-61 price column, it would be extremely dangerous to assume that these high prices were justified or compatible with their inherent values. Many of them were not, as their later severe correction can testify and is shown by their 11-29-61 price column which, in many cases, represents quite a slash!

Name of                             Offering              Price                Price
Companies                           price             (3-27-61)        (11-29-61)

Avnet Electronics                      17                    293/4               297/8
National Patent                         1                      9¾                   l5½
Development Corp.
Technical                                  5                      l83/4                15

Measurement
Klondex                                   2                      l54                   5
Electronic International              10                    23½                 l3¾

Capital

Alloy Unlimited                         15                    27                    l6¾
Geotechnics & Resources         2                      3¼                   23/4
Cove Vitamin &
Pharmaceutical                         38                    12                    18
Vacuum-Electronics                  15                    30                    21
Resisto Chemical                      2½                   9¾                   7½
Digitronics                                22½                 273/4               29
Wings and Wheel Express        3                      83/4                 6

Name of                             Offering              Price                Price
Companies                           price             (3-27-61)        (11-29-61)
International
Electronic Research                  9                      l7½                  153/4
Geochron Laboratories             1                      2¾                   N.A.
Berkey Photo                           113/4               25                    125/8
Elion Instrument                        3                      23½                 16
Hofman Lab.                            6                      15                    l2½
MCA, Inc.                               l7½                  593/4               80
Faradyne Electronics                5                      l93/4                9½
Copymation                              3                      15                    12¾
Lafayette Radio Electronics       5                      204                  27½
Circuit Foil                               7½                   42½                 26
Electronic Assistance                12½                 393/4               123/8
General Atronics                       32                    83/4                 43/4
Columbia Technical                  3                      7                      4¾
Herman H. Smith                      3                      8¼                   8½
Alderson Research Lab.           3                      10½                 44

Now, the inevitable big question: How do you decide to buy or not to buy a new issue? Actually, the decision is not as tough as it appears. The offering circular or prospectus should give you a rough idea as to the quality of an issue or what type of underwriting the new company is obtaining.

Remember, underwriting firms are the backbone of companies when they go public. To a large extent, the type of underwriting obtained determines their strength.

Basically, there are three types of underwriting. First, the "Best Efforts" type, which is, according to a Globus, Inc., booklet, Why Go Public? "the weakest form of underwriting, because the underwriter agrees to do the best he can to sell the issue but does not guarantee that if he cannot sell the issue, he will purchase for his own account any unsold securities."

The second is the "All or None" type which, continues the Globus pamphlet, "implies that the underwriter will sell the issue completely or return any monies collected from the public and cancel the underwriting if a sale cannot be effected."

The third is the "Firm Commitment" type, in which "the underwriter guarantees to purchase the agreed upon financing whether or not he can resell same to the public. This is the strongest form of underwriting and is used only by top underwriting companies."

So if the underwriter, who probably should know what he is doing, makes a firm commitment to buy the whole issue for his own account in case of necessity, there appears comparatively little risk for the investor in buying the stock at offering or slightly above offering. In order for an underwriter to make that kind of commitment, he must be very selective in his choice of companies being underwritten.

Take Globus, Inc., for example. They specialize in moderate-sized companies, that is, $300,000 to $3 million underwritings. They consider only firm-commitment underwritings, choosing companies which must have an outstanding record of progress, a unique product, or some other special promise. They have made a policy of backing their underwritten companies with various services before, during and after underwriting, including keeping the financial community up-to-date on corporate developments, arrangement of immediate cash or secondary underwriting, recommending other companies for merger or acquisition.

Generally speaking, new issues underwritten by large, long-established houses like Lehman Brothers; Hayden, Stone; Shields & Co. are favored because (1) they have larger resources to back up their underwritten companies in case of necessity, and (2) it should be in the interest of the underwriting firms to support their underwritten issues at a level not below the offering price.

There is nothing new in the so-called new issue boom. A short while back, Leslie Gould, Financial Editor of the New York Journal-American devoted a column to an analysis of the boom of 1945-46. I'd like to quote from that column now.

If the record of the past means anything, the odds are against the unwary buyer coming out with a profit. In some issues he may be lucky to have anything left.

Fifteen years ago there was wild speculation in 'hot' issues. The following table shows what happened to a random list of the 'hot' new issues brought out in 1945 and '46. It gives the issue, the offering price, and the latest reports on how 31 of these issues fared.

Issue                                        price                    Latest report
Arco  Chem.  Prod                     37/8                  8 bid, ½ asked
Air Cargo Transp                       3                       Charter forfeited '48
Anchorage  Homes                   601/4                  Liquidated '48
Appleton Mfg                           23/8                   Charter forfeited '52
Ceraseal  Chem                           5                      No market
(Units 1 pfd, 2 com)
Cortley  Frost. Foods                 3¼                    Bankrupt '52
Cosmo  Records                        4                       Bankrupt '48
Doyle Mfg. pfd                         10                       Bankrupt '49
Drug Products                           4½                     3c bid
Duggan's Distill                         2                        ¾ bid, 7/8 asked
Expreso Aero                           3                        lc bid, 6c asked '60
Flamingo Air Serv.                    2                        Charter voided '50
Fleming Hall Tob                      15                       Bought by U. S. Tobacco
(Units 1 pfd, 1 com)                                            Liquidated $11.75 unit
Flying Tiger Line                        5                        871/2
Globe Aircraft pfd                    10                       Bankrupt '47
Havana Litho                            5½                     87½c
Higgins                                     11                       Worth 63c in N. Y. Ship.
Hytron  Radio                             5                       Worth $41 in CBS
Jack & Heintz                           17                       Worth $19½ in Siegler
Jet  Helicopter                           2½                     No market
Latin Amer. Airways                   3                       Out of business '49
Myler  Plastics                           2                        No market
Neville Is. Glass                        101/8                  Charter forfeited '52
(Units 1A, 1 com)
Pratt's Fresh Frozen Foods         6                       Bankrupt '49
Princess Vogue Shops              10                       No market
(Units 1 pfd, 1 com)

                                             Offering
Issue                                     price                 Latest report
Ramie   Mills                         27/8                 Foreclosed '49
Reporter   Publ                      3½                   Assets sold '57
Silver  Creek  Prec                3¼                   2/4
Super Cold                            6                      Liquidated $7.08
Trans Carib Air                     3                      Worth $34 in Trans. Corp. of
Gloria Vanderbilt                   3                      America Charter forfeited  '52
 
A look back at the 1945-46 'hot' issue era finds that of 46 such stocks picked at random, only five are selling today above their public offering price, and only three of these show substantial profits. Odds of 46 to 3 for a long pull investor, who gets in at the public offering prices, of doing well make this a 'long shot' bet.

And, warned Mr. Gould, "It could happen again."

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