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Home Publications Blogs Beat the Press Potbelly's Stock Doubles on Day of IPO, Redistribution to the 1 Percent?

Potbelly's Stock Doubles on Day of IPO, Redistribution to the 1 Percent?

Saturday, 05 October 2013 06:29

The Washington Post told readers that the stock of Potbelly, a fast food restaurant chain, rose by 120 percent on the day of its initial public offering (IPO). This rise raises several interesting questions that the piece does not mention.

First, if the extraordinary rise in price is in fact justified by the fundamentals of the market, then the underwriters badly muffed their job. They set a price for the stock that was far too low, costing the company large amounts of money. They should have made their initial offering at a much higher price.

In that case, a main theme of the piece should be identifying the underwriters and asking them how they could have been so far from the mark in assessing the company's market value. After all, these people are paid big salaries to know things like this. Someone failed badly in their job if the run-up is justified by the fundamentals.

The alternative scenario is that the run-up is not justified by the fundamentals and this just another outbreak of irrational exuberance. If that's the case, the people who bid up the stock price will end up as big losers. In that case readers might be interesting in finding out what sort of investors were throwing their money away.

In the event that the investors were rich hedge fund types then this would just be a redistribution within the 1 percent. But if the investors were pension funds (either public funds or private funds guaranteed by the taxpayers), then overpaying for Potbelly stock would imply redistribution from the bulk of the population to the insiders who managed to dump their stock near yesterday's high.

Unfortunately the Post, like other news outlets, covered the Potbelly IPO like a sporting event. It treated the stock price as though it is money from heaven rather than a claim on the economy's resources. 

Comments (6)Add Comment
Good summary of the IPO market
written by John Wright, October 05, 2013 8:46
Accurate reporting like Dean's will not be picked up by the mainstream media.

The MSM have conditioned the public to believe a successful IPO is one in which the price increases dramatically in the first day, when, as Dean points out, that is evidence the IPO was priced too low and money was handed to the early flippers, not to the IPO company.

With intelligent pricing, one would expect the IPO market to behave as the rest of the market with prices adjusting to new information. And if the underwriters were doing their jobs, IPO prices would follow the bumps of the overall market, not having their own uncorrelated bumps.

I remember reading that Katherine Graham suggested the NYSE and the old ASE should pay advertising rates to the Washington Post, like other merchandisers, to have their products, securities in this case, listed in her paper.

But that was a long time ago.

Now the Washington Post is fully invested in pimping for the securities industry.
It depends on the "story"
written by Jennifer, October 05, 2013 8:49
So interesting, the questions you bring up would have not occurred to me right away, if at all, as the thrust of this story is more about the rise of "fast-causal" restaurants. But, I am completely familiar with the points you raise because these issues were discussed openly in the media when Facebook went public. In that case, the opposite happened, their stock fell quiet a bit. There was questioning about the price-some tried to argue they should have underpriced-it looked bad to have it tank- it but of course as you say that takes money away from the company. The overall coverage, although much greater, was he same as in this article, treating it like sports event instead of focusing on the effects of regular people.
written by Kat, October 05, 2013 10:59
Unfortunately the Post, like other news outlets, covered the Potbelly IPO like a sporting event. It treated the stock price as though it is money from heaven rather than a claim on the economy's resources.

It's always money from heaven unless it's say, Social Security benefits. That is the only time the pie is not expanding or the tide isn't lifting.
written by AlanInAZ, October 05, 2013 11:43
Shares of Sprouts Farmers Market rose 123 percent in the natural and organic grocery’s August IPO. Restaurant chain Noodles & Co.’s stock more than doubled in its June debut.

Dean's point about setting the price too low seems valid given the run-ups in similar IPO's. My concern would be small investor's jumping on the bandwagon after the music stopped. Pension Funds are sophisticated and should be able to play the game.
Ipo price justified
written by Jim, October 05, 2013 12:07
They priced the thing at over 10x ebitda as per the S-1, and it actually has decreased on a 2013 run rate, alternatively 20x 2012 earnings This is not cheap. It ran up to 45x trailing earnings which is comparable to Chipolte valuations. What is interesting about the business is it's ability to increase revenue and profit while being able to decrease working capital. This is a characteristic of a business like Sees Candy which gives owners the ability to extract growing free cash flow. A similar thing happened in the Noodles Ipo but I would argue it would have been difficult to bring a company with 2 years of profitability to market at more than 20x earnings even though comparable companies are trading at much richer valuations.
old story...lots of research on this topic
written by pete, October 07, 2013 11:36
Jay Ritter is the expert on IPOs...here is a review article he did:

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.