Dallas-based chicken wings restaurant chain Wingstop, Inc. ($WING) priced its IPO at $19 per share, valuing the company at $543 million. It offered two million shares of common stock and stockholders sold another 3.6 million shares, bringing the total sold to the public to near six million, bringing $100 million to the company coffers. Pre-IPO hard circles created high demand because they bumped the offering price range out from $16 - $18 to $17 - $19, always an indication that the guy running the book wants to make sure everyone knows the opening range is a higher bid.
It works like this: Some insiders – large funds – are willing to be "opening buyers" when trading starts. In this case, it’s around $30, so you get issued 100,000 @ $19, and you buy 100,000 @ $30 in the opening range, meaning you own 200,000 shares at about $24.75 and the stock is trading $30ish, so you have a nice lead on a piece of the company averaged below where they are trading.
IPO's became popular because funds did not have to chase shares in the open market in the case of runaway demand. That was the original idea behind the IPO methodology, but during the heyday of the Internet boom and bust, you made much more than $5.00 on 200,000 shares. In some cases, you made as much as $25 on 200,000 shares, and the biggest hedge funds got in the "hard circle" group, netting $5 million.
The Hard Circle Advantage
Being in the elite group of hard circle funds is a huge advantage, and it is also a large contributor to the hedge fund's annual returns (as much as 20%) on a yearly basis. The reasoning is simple – the hedge funds do the most commission business and can afford to buy after market shares, which is why wealthy investors invest in hedge funds to begin with.
Somewhere there is a Retail Wealth Manager who was hard circled on WING because his brokerage house brought WING public via IPO and is happily calling the client who wanted a taste of the IPO calendar. Now everyone is happy – the company is happy because they raised $100 million and sold some internal shares, the funds are happy because they have a nice lead on 200k shares, and the exchange is happy. As long as it keeps going up, everyone is happy.
What you want to watch for is if it trades below $25 for the funds that have 200k shares. You also want to watch the first quarter numbers 90 days from now to see who will stay around. What will really matter is this: Does the company sell enough chicken wings, and did they meet margin projections so the $100 million they raised stays in the trusted hands of those who were hard circled? If not, shares will dump below that $25 area, and you will see a test of issue price at $19.
Those are two areas to watch, but you have 90 days, so sit back and enjoy some excellent wings from Wingstop. I love these Dallas-based wings, I just hope the public likes the stock as much as they like the wings. We’ll find out in late August, when they report their first earnings quarter as a public company.