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 McDonalds (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.
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