Black Enterprise — August 2012
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When a Company Like Facebook Goes Public

Should you invest in initial public offerings?

EVENTS OF WORLDWIDE SIGNIFICANCE, INCLUDING the Greek debt crisis and plunging oil prices, couldn't compete with Facebook's initial public offering for investors' attention on the popular social networking service that launched in February 2004. There were highs and lows, as the stock rose to $45 a share and retreated to around $25. As of this writing, the stock trades around $32, off from its $38 IPO price.

Ronald Parker of Baltimore set his eyes on Facebook before the first day of trading. Using his Fidelity Investments brokerage account, he purchased 300 shares at $42 each, and another 200 shares at $36. Parker concedes that most small individual investors are shut out of buying hot issues because brokerage firms allocate IPO shares to institutions and other prime customers.

While most investors focus long term, and rightly so, investing in stocks and mutual funds through their 401(k) plans, Parker says some dividend-seeking investors look for stocks that are going to pay them 3% to 5%. Then there are traders like him self who identify high-growth companies such as Google and Facebook that move up and down in price.

Parker has since sold 200 shares of Facebook, buying and selling some put options once its stock price fell to $27 a share. In simple terms, there are two kinds of contracts options: "calls" let an investor buy a certain stock at a price and "puts" let an investor sell it at a certain price. Calls are generally used by investors who want to profit from a rise in stock prices, but avoid sharp losses. A put is used by investors seeking to profit from a fall in stock prices by selling the stock at a higher price quoted in the put before its expiration date.

Parker still owns 300 shares of Facebook. He wants to wait it out. "Most high-tech stocks would be making a lot of money if it weren't for the economy and European debt crisis. But I still believe that tech is going to be a main driver," he says.

Does the Facebook price saga indicate that individual Investors should shy away from IPOs? Not necessarily. "For the most part, IPOs are usually underpriced. They tend to perform well in the first year of public trading," says Shawn D. Baldwin, chairman and CEO of Capital Management Group, a boutique investment bank and research advisory firm in Chicago. Baldwin's firm has participated in more than $68 billion in underwritings, including success stories such as Google, in which CMG was a co-manager. Baldwin says sometimes it's better for individual investors to wait a while and see how the stock does after its IPO to find a good buying opportunity. "Look hard at the company and its industry before you invest."

Indeed, companies that are now household names-Microsof, Google, Intel, Walmart, Home Depot, Disney, Dell, Coca-Cola, Target, Starbucks, etc.-were once IPOs. If you had invested in any of these, you may have had some volatile price fluctuations along the way, but over the years you would have made enough money to substantially change the quality of your life.

A single share of Johnson & Johnson purchased for $37.50 at the IPO in 1944, after stock splits and reinvested dividends, would be worth more than $1 million today. Similarly, a $5,000 investment in Walmart's IPO for $16.50 per share in October 1970 would be worth more than $60 million. Clearly, a well-chosen IPO investment can be a financial boost if you make sound choices and hold on to them. On the other hand, companies such as WebVan, the bankrupt Web grocer, and have left investors with large losses.

So how do you increase your chances of finding a Google instead of a Webvan? "Do the work," says Carla Harris, a managing director with Morgan Stanley in New York. "You can do it yourself or trust that your financial adviser has done it carefully."

The work, in this case, is looking into an IPO company's background and evaluating its future prospects. "Read the IPO prospectus and other offering materials," says Harris, who has executed such transactions as IPOs for UPS and Martha Stewart Living Omnimedia. "Look at the trajectory of sales, earnings, and read the risk factors that are listed and evaluate them." As a result of your research, you should be able to make a cogent argument for investing. "You should be able to explain why you think the company will perform well," she adds.

Besides checking on the outlook for individual IPOs, you may be able to use broad market trends as a guideline for investing. "Our data show that IPOs historically outperform the broad stock market, coming out of periods of low issuance," says Kathleen Shelton Smith, a principal at Renaissance Capital, an IPO investment advisory firm in Greenwich, Connecticut, and a leading source for IPO research and analysis. After the August 2008-February 2009 and the August 2011-September 2011 stock market downturns, during which IPO issuance dried up, IPO stocks outperformed the major market indexes. The average return on all IPOs priced in the first half of 2012 was 20.8%, says Shelton Smith. Only the strongest, most attractively valued IPOs are able to come to market in such environments, and those stocks generally do well once trading begins.

"We are now in a period of minimal IPO issuance," says Shelton Smith, "and I'm not sure how long it will last." For any investors still eyeing Facebook, she suggests to first wait for confidence to return to the broader equity markets. Second, look for Facebook to apparently find a bottom; that is, the stock will stop dropping. With a class action filed against Facebook for not disclosing information about its IPO to the public, "investors should factor in the negative consequences of management distraction, legal costs, possible dollar settlements, and reputational risks of these pending lawsuits," she adds. "Also, new IPOs will start up again," says Shelton Smith. "These new IPOs probably will be priced attractively at that point because most investors will not have forgotten the Facebook disaster."

Looking ahead, the company has a sound business proposition, which should be evident in the revenue numbers that come out. "I also expect Facebook's stock to get a pop when the company goes over 1 billion individual users," says Baldwin.

Moreover, Baldwin notes that Facebook is so large and so widely followed a company that its stock will be included in major stock market indexes. "That means many index funds and ETFs will buy the stock, increasing demand and driving up the share price," he says. "Those funds will hold on, too, so selling pressure may be reduced."

Facebook is a top holding of Renaissance Capital's Global IPO Plus Afermarket Fund (IPOSX). For $5,000 ($2,500 for IRAs), individuals can invest in the mutual fund's diversified portfolio of newly public companies that meet a strict investment criteria of the portfolio management team at Renaissance Capital. Notes Shelton Smith, history has shown that some of the greatest stock advances of all time occurred when companies were early in their development of groundbreaking products and services that eventually transformed industries and changed people's lives. -Donald Jay Korn


Blue Chips Poised for Share Growth

Michael McGee sees value plays in three big company brands

MICHAEL MCGEE IS A HOPEFUL PRAGMATIST. DURING 2012'S second half, the Detroit-based independent financial adviser projects that U.S. economic growth could rise 1% to 2%, even as employers remain reluctant to add workers as they monitor fluctuating financial markets and the presidential and congressional elections with uncertain outcomes.

McGee, who has been affiliated with international insurer Allianz Life Insurance Co. For four years, is also concerned about the U.S. debt levels, the eurozone crisis, the expiration of the Bush-era tax cuts, and ongoing political strife. Such flux nearly ensures that corporations will hoard cash until there are clear post-election directives from Washington, he believes. Moreover, consumers will likely use their paychecks to whittle debt rather than make new purchases. These conditions could make it hard for the markets to sustain any rally or move upward. But McGee, who worked for Smith Barney and Merrill Lynch before opening his own firm in 2008, contends that careful investors should consider the following. -Frank McCoy

1 CITIGROUP INC. (C) Citi, which had 2011 revenues of $111 billion, may have been slammed by the recent financial crisis and had its stock price punished, but it is gaining ground. It is a growth investment now, says McGee. Positive moves include continued management and division restructuring, and a reverse stock split in 2011 that should attract more institutional investors. Citi is rebuilding its investment banking operations, says McGee, anticipating simultaneous rises in the economy and lending as money center banks will be needed to assist the financial rebuilding of the domestic and global economies. Currently, McGee says that "the stock is undervalued and Citigroup is getting lean to be ready for the pickup in lending." Analysts' median target price is $40.

2 FORD MOTOR CO. (F) "I like this inexpensive stock as a value play where investors have an opportunity to own an American icon of a company for less than $11," says McGee. Buoyed by strong investor response, Ford Motor Credit has sold $1.5 billion in bonds and last June converted $2.5 billion of asset-backed securities into unsecured debt. Ford is paying down debt and has begun to pay a dividend again. "The company has a low price-to-earnings ratio and great-looking cars and trucks. [President and CEO Alan] Mulally has restored a culture of quality, and the reinstatement of the dividend tells me the company is on the right track. The blue oval is back at Ford," says McGee. Analysts' median target price is $15.

3 CVS CAREMARK CO. (CVS) will benefit from a rising older population, soaring healthcare costs, and increased need for services and products. It is the U.S.'s largest pharmacy healthcare provider, with more than 7,300 stores, and about 75% of the U. S. population lives within three miles of a CVS Pharmacy. Revenue streams include the federal Medicare Part D program that subsidizes prescription drugs for older or disabled patients. Within the next four years, the Woonsocket, Rhode Island, company, which boasts more than $107 billion in annual revenues, plans to expand its walk-in MinuteClinics, whose practitioners, it says, "specialize in family healthcare and can diagnose, treat, and write prescriptions for common family illnesses." The prospect excites McGee, who says "this company has room to soar." Analysts have set a high price target at $51.


The Lowdown on

Medical Sharing Plans

Consider the risks before spending money on this health insurance alternative

WITH HIGH UNEMPLOYMENT AND AVERAGE ANNUAL health insurance premiums topping $5,000 per person, thousands are forgoing traditional health insurance for medical sharing plans-programs in which members share each other's healthcare costs. But while such programs can save you money, they may pose other risks, consumer advocates say.

Christian medical sharing plans are faith-based programs in which you pay a monthly fee that goes toward the medical costs of other members. In return, other members chip in to take care of your medical bills. The programs are not considered insurance plans, and they received an exception from the Patient Protection and Affordable Care Act, so members won't have to buy health insurance under the law's individual mandate.

"We don't do this because we have a problem with insurance," says Tony Meggs, president and CEO of Melbourne, Florida-based Christian Care Ministry, which offers a medical sharing plan called Medi-Share to approximately 50,000 members. "What attracts people to our program and the other ministries is this idea of how the early church came together and shared their resources to take care of each other."

To be eligible for such programs, you must adhere to Christian principles. For example, you might have to agree to a statement of faith, attend church regularly, and refrain from premarital sex and illegal drug use. If you have a medical condition that results from what the group considers to be a non-Christian lifestyle, such as a pregnancy outside of marriage, the condition won't be covered. "These programs aren't for everyone," admits Meggs.

Members typically pay an administrative fee and a monthly contribution for medical expenses. For example, Samaritan Ministries International, another Christian medical sharing plan based in Peoria, Illinois, charges $150 a month for singles, $300 for a couple, $215 for a single-parent family, and $355 for a two-parent family. With approximately 65,000 people (21,000 families) taking part in the program, Samaritan Ministries raises more than $5 million per month for medical sharing, says Executive Vice President James Lansberry. The organization then determines where the contributions go, "so I share with one person and that person I'm sharing with may be sharing with someone else completely," Lansberry adds.

But when you get sick, there is no guarantee your ailment will be covered in part or in full. These programs are strictly voluntary, both Lansberry and Meggs point out. The members or a member-elected board determines what types of conditions are eligible for sharing. For example, Medi-Share doesn't cover routine wellness visits. Samaritan Ministries won't share dental or vision costs. The factors surrounding a sickness or injury may also make a difference. For example, Medi-Share states on its website that members won't pay for injuries from a car accident if the vehicle "was used in a race, to perform a stunt, or in the commission of a crime."

There may also be limits to how much an individual can receive. For example, Medi-Share will pay up to $1 million per year for an individual, with a $5 million lifetime limit. There are also cases in which pre-existing conditions won't be covered, prompting criticism from consumer advocates.

"These programs often discriminate against those who have pre-existing medical conditions and may decide to exclude a member who develops a medical condition after becoming a member," says Ronda Sloan, a spokeswoman for the Kentucky Department of Insurance. "This could have devastating financial and medical impacts on a consumer." There are other reasons consumers should think twice before signing up for such plans, Sloan says.

You won't have consumer protections offered by your state insurance department, which regulates insurance companies that operate in your state.

You lose a key benefit of the Health Insurance Portability and Accountability Act (HIPAA) of 1996. If you change insurance providers, you can avoid lengthy waiting periods for the coverage of pre-existing conditions if you haven't had a break in insurance coverage of more than 63 days.

Since medical sharing plans aren't health insurers, "consumers who buy one of these products could encounter a waiting period before pre-existing conditions are covered under any future health insurance plan [before the new law is implemented in 2014]," Sloan says.

You risk hurting your credit if the medical sharing plan refuses to pay or pays slowly.

Some medical sharing plans have had their share of legal troubles. For example, the Supreme Court of Kentucky ruled in 2010 that Medi-Share operated as an unauthorized health insurer in that state and should therefore be subject to stricter regulations. The evidence used in the case was outdated, so the ruling is no longer applicable, Meggs says. However, the Department of Insurance disagrees and has asked that Medi-Share cease operation in that state. Litigation in the case continues. -Tamara E. Holmes


While medical sharing plans may be appealing to some, consumers should check into other options before making a decision.

The Pre-Existing Condition Insurance Plan (, a federal high-risk pool, providescoverage to those who have been denied coverage because of pre-existing conditions.

The National Association of State Comprehensive Health Insurance Plans ( provides information for state high-risk insurance pools for hard-to-insure individuals.

GradMed ( offers short-term major medical coverage for graduates of nearly 200 colleges and universities across the country.

We encourage consumers to call insurers and inquire about the plans available, which may range from plans with rich benefits to plans that provide a safety net for catastrophic events," Sloan says.


New Consumer Complaint Database

The Consumer Financial Protection Bureau has developed a public database for consumer credit card complaints. Right now, the database only contains information regarding credit cards, but the CFPB is proposing to expand it to include all other consumer financial products and services. Go to to get details about the database and how to file a complaint.

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