October 05, 2013
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.
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