Institutions exclude others from hot Nymex offering

NEW YORK » The New York Mercantile Exchange's IPO is one of the hottest Wall Street has seen in six years, with investors already reaping big returns as the stock's price doubled. Too bad rank-and-file retail investors didn't see much of it.

Shares in the 134-year-old exchange vaulted some 125 percent on their first day of trading on the New York Stock Exchange, but hedge funds and other major institutions were expected to be among the initial public offering's biggest winners.

Retail investors essentially were boxed out of owning shares of Nymex Holdings Inc., although they still have a chance to buy in the coming days as the stock price stabilizes. They can also look toward a secondary offering since the Nymex only floated 7 percent of its total shares.

Still, "almost by definition the little guy gets cut out of these deals," said David Menlow of IPOfinancial.com. "They're not supposed to work that way, the playing field hasn't been leveled, and anytime you have situations of limited supply and unlimited demand somebody is going to get shut out."

With an unusually hot IPO, the first wave of buying typically goes to major banks, brokerages, mutual funds, money managers, and hedge funds. Nymex rivals' CBOT Holdings Inc., Chicago Mercantile Exchange Holdings Inc., and InterContinental Exchange Inc. all have massive holdings by this class of investors.

However, shares of publicly traded stock and futures exchanges are even more attractive to hedge funds. Recent consolidation among financial markets -- such as the Chicago Merc's $8 billion offer to buy rival CBOT -- has hedge fund managers looking to cash in if the Nymex merges with another player.

Also, futures contracts like those offered on the Nymex are a popular tool used by hedge funds to diversify, betting on the price of oil, metals and other commodities. So, owning a stake in the Nymex also helps hedge funds collect back some of the fees charged them to complete these transactions.

"Hedge funds are really coming after the Nymex early," said Stephen Carl, principal and head of equity trading at the Williams Capital Group. "With all this consolidation among exchanges, this kind of investment looks good to them."

Nymex won't have to disclose to regulators who took large ownership stakes in their company for some weeks to come. However, funds such as Scout Capital Management, Sands Capital Management, and Marisco Capital Management are all major investors in the other futures exchanges.

And, without taking advantage of the first day of trading's surge, is it even worth it for retail investors to come in this late in the game? While publicly traded stock and commodities exchanges are all the rage right now, some on Wall Street are questioning what kind of value they'd bring to a portfolio.

The nation's six publicly traded exchanges currently have high price to earnings ratios, a metric that evaluates the attractiveness of a company's stock price. The high p/e ratios suggest that profit at these exchanges must remain lofty to carry the kind of stock prices they command.

Shares of the company rose $73.67, or 124.9 percent, to $132.67 from their initial offering price of $59. At this price, the Nymex is trading at 73 times its annualized earnings. That's more than the Chicago Merc, which trades about 47 times its annual earnings, and the 43 times carried by IntercontinentalExchange.

Further, most of the exchanges only recently went public, and lack earnings records. There's little consensus among analysts on ratings or price targets, and all the stocks are trading at or near their highs.

Ed Keon, chief investment strategist with Prudential Equity Group, said investors who want to hang on to the stocks need to be prudent.

"Individual investors should be cautious about buying any individual stock, and think it through carefully whether it a new IPO or a company that has traded for 100 years," he said. "You especially have to be wary of a company that's had such a big one-day pop, which might make it more difficult for individual investors to assess."