Shares: Weigh the fresh crop carefully: New offers made in a bearish market often do well

IN THEORY, new issues on the stock market are a licence to print money. The advising merchant banks and stockbrokers will price an issue at a 5 to 10 per cent discount to equivalent shares already quoted, ensuring a profit of that order for investors subscribing when dealings begin. Repeat the exercise 20 times a year and you will double or treble your money. But, of course, there are very few free lunches.

In the real world, it is surprisingly hard to make money from 'stagging' new issues, as this activity is called. However, there are opportunities - though only for those prepared to do their homework.

The illusion of easy pickings comes from 20:20 hindsight on new issues that have proceeded to do very well, and from the huge premiums that develop on some stocks. The only way to make serious money is to buy a share that goes to a huge premium unexpectedly. Tadpole Technology has become a legend because it was floated at 60p, opened for trading at around 70p and surged to a peak two months later of 360p. The Tadpole phenomenon happened partly because the stock market was hungry for blue-sky hi-tech stocks with a sexy story and also because it was floated at the start of a new bull market for shares in smaller companies.

That particular game doesn't work any more. When Quality Software Products, another hi-tech stock with a good story, was placed at 380p in March, the shares opened at 515p and the first serious dealings took place five minutes later at 540p. Despite announcing a major order for a new accounting package, the company's shares are only 547p currently and could go up or down.

Readers may conclude that the way to make money from Quality Software was to buy shares at the 380p flotation price. But there is a vicious Catch 22 that wrecks this approach. The catch is that if the shares are obviously going to a substantial premium, they will be near unobtainable. RPC, a plastic packaging company, looked an attractive issue but applicants in the Offer for Sale received a 10 per cent allocation. If they funded that with borrowed money, they might well be showing a loss after financing costs despite the shares going up by a 25 per cent premium.

Worse still, the sponsors often get the pricing wrong and shares go to a discount in first-time dealings. In these cases, you will receive a generous allocation of shares. The reason privatisations are such great moneyspinners is that not only is a premium guaranteed, but it is possible to buy a decent holding at the issue price. Anyone who had stagged every single new issue this year would probably now have a substantial paper profit on their BT shares (which I would run) and a small offsetting loss on all their hard work buying the others.

There is money to be made from new issues but you need more traditional investment techniques than just throwing money at everything. New offers made when the stock market is in a bearish mood often do well because it takes a good issue to attract any interest, and also because of the scope for the shares to move to a higher rating when the market revives. That is why new issues made through 1992 have turned out so profitable.

There is also the early chance to buy shares in possible growth stars of the future. Anyone who bought shares in Domestic & General, the domestic appliance insurer, immediately after the 1988 flotation at 180p, now has shares standing at 1558p.

Another phenomenon worth looking out for is the company that floats in a flurry of interest, goes to sleep and then takes off again after good news or results. Candidates to buy in the quiet period would be packaging and paper concerns such as RPC at 162p, Inveresk at 173p and Field Group at 294p; financial services group Sharelink at 288p; and pipeline services group Metrotect at 135p.

Another area where there may still be Tadpole-style profits is investment trust warrants. New investment trusts typically offer warrants to compensate investors for the risk that some shares may drop to a discount to asset backing. A number of these warrants started trading in detached form at 20p and moved up smartly to around 50p. Even at the higher prices, some still look worth buying. My favourites would be Perpetual Japan at 46p and Govett Emerging Markets at 49p.

Given the precedent of other investment trust warrants, these could prove to be excellent long- term performers.