It’s true that analysts must meet tough disclosure and conflict requirements, primarily because of the abuses during the bubbly 1990s. Yet the fact is that it’s still rare to see a sell recommendation on an IPO. Simply put, it could wreck a deal.
In the case of Facebook, the three lead underwriters — Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) — have issued about 40 reports on the stock, and they’ve all provided buy recommendations. This is so even though they’ve all lowered their price targets on the stock.
In fact, Morgan Stanley recently settled a case with Massachusetts over allegations of lack of disclosure on the Facebook IPO. However, the fine was just $5 million, which is chump change for a huge investment bank.
Now, this is not to imply that Wall Street analysts are corrupt and that their opinions should be dismissed. If anything, their reports often have useful information.
But when it comes to analysts’ stock recommendations, investors should still be leery. Let’s face it, Wall Street analysts have little incentive to be gutsy.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.