When a company has an IPO, it must abide by a variety of arcane securities regulations. One of the most common is the “quiet period.” Basically, a company cannot talk up its prospects. In fact, the quiet period also applies to the Wall Street underwriters. They cannot disclose their research until 45 days after the offering.
So, as should be no surprise, investors actually trade on these windows. After all, it is common for the analyst research reports to be upbeat.
Just take a look at Dunkin’ Brands (NASDAQ:DNKN). This week, Robert W. Baird put an “outperform” rating on the stock as well as a price target of $33. As for JPMorgan (NYSE:JPM), it has an “overweight” rating and a price target of $30. Keep in mind that Dunkin’ currently is trading at $26.
So there is some upside, right? Not necessarily. Goldman Sachs (NYSE:GS) is not as sanguine on Dunkin’. Actually, the firm placed a “sell” rating on the stock, with a price target of $23.
This certainly is a gutsy call. No doubt, IPOs are a lucrative business for Wall Street firms. So why anger a client?
Thus, it is important to take note of Goldman’s call. It should be a warning to investors.
Now, Goldman still thinks Dunkin’ is a solid company with decent growth prospects. Yet the fact is it is selling at a valuation higher than rivals like Yum! Brands (NYSE:YUM) and McDonald’s (NYSE:MCD). Consider that Dunkin’ is selling at a premium to even Starbucks (NASDAQ:SBUX).
For the most part, it is not uncommon for brand-name IPOs to sell at frothy valuations. Short-term traders usually generate lots of enthusiasm. Then again, there usually is a small amount of shares on the market, which makes it easier to move the stock price.
But over time, the float will expand, and yes, there will be more downside pressure. So unless Dunkin’ can accelerate growth — which seems unlikely — the stock could be vulnerable at current levels.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.