Initial public offerings are like a big, exclusive party that all investors are invited to but only a few can actually attend.
Expect more of the same from Alibaba, the hotly anticipated tech IPO -- the largest ever. It's already fully subscribed but likely to be mostly out of reach for small investors, at least initially.
"It's totally pathetic," said Michael Cohn, chief market strategist at Atlantis Asset Management. "The public's just not allowed to participate. ...The large fund people that manage money for, just say, the Fidelitys, the Vanguards of the world and the hedge funds, are the ones that get the largest allocation."
Cohn figures the retail side that he represents may be able to get a 25 percent to 30 percent fill on their orders, but that probably will be the limit.
"The public's just not allowed to participate. ...The large fund people that manage money for, just say, the Fidelitys, the Vanguards of the world and the hedge funds, are the ones that get the largest allocation."
"The question is, do you really want any?" he said. "This is so big, it's hard to wrap your head around it."
Retail investors have faced varying levels of success in getting a piece of some of the most recent IPOs. Facebook, for example, was an easy buy as underwriter Morgan Stanley scrambled to get the social networking site's much-ballyhooed open just to its break-even level.
Twitter shares, on the other hand, were almost impossible to get at the outset, and the same went for LinkedIn, the social network for professionals that saw its price soar as much as 137 percent on its opening day. Those gains, though, were isolated as retail investors—the mom-and-pop crowd—found themselves shunted to the sidelines
A slim chance
Tight as supply might be for online marketplace Alibaba, there are some signs that average investors might at least get a taste.
"It is a very large deal and not going into many benchmarks, so several investors will not buy much, which means the retail investor has a chance to get some of the offering," Walter Price, manager of the $1.3 billion Allianz RCM Technology Fund, said in an email interview. "It is not a household name (in the U.S.), like the previous mega deal, Facebook, so demand should not be as tight. Of course it is a household name in China and Hong Kong and retail demand could be very large there."
While demand has pushed Alibaba's valuation to the $160 billion neighborhood and the current pricing expectations are in the $60 to $66 per share range, some traders expect the price to be more like $90 to $100.
Investors late to the party, then, could end up buying high.
"You don't often have a deal that's this anticipated, and the second day of the road show was already signaling that the deal is one-time covered," said Art Hogan, chief market strategist at Wunderlich Securities. "That speaks to the institutional demand that's out there already."
"You're going to have a carve-out for retail, but it certainly doesn't feel like it's going to be large," he added.
The best approach for the mom-and-pop crowd, then, might be patience.
Those who waited out the initial hoopla over Facebook, for instance, had a great chance to buy low after the initial enthusiasm waned. The stock has since doubled from its initial pricing, from which it fell about 50 percent. Investors who bought at the September 2012 low are up a whopping 340 percent.
Nick Colas, chief market strategist at New York brokerage ConvergEx, said IPOs are often about a showmanship that investors necessarily have to wade through.
"Capital markets professionals have a phrase—'The illusion of scarcity'—that is their mantra for all public market transactions," Colas said in a note to clients Thursday. "Even on the largest deals—primary or secondary stock, it matters not—they must hold forth the proposition that demand far exceeds supply.
"By contrast, that dynamic is more muted in secondary markets. Liquidity always plays a role, to be sure, as do news events that change the market's view of a fair price. But given enough time and patience, you can generally buy all the stock you want. "