Quiet Periods

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After an IPO is priced and opens for trading it does so as an "uncovered" stock since the investment banks are in the IPO quiet period during which they can't publish any research on the company.

The ending of the quiet period is important because when the underwriters all launch coverage on that day it can have an outsized impact on the stock. The duration of the quiet period has changed over the years and recently the SEC has shortened it to 10 days. HOWEVER the vast majority of investment banks STILL OBSERVE THE 25 DAY RULE. That means their coverage starts 25 days after the day of pricing. Although it's not clear why the banks continue this practice it's been pointed out that it coincides with the ending of the period during which they are obligated to send out copies of the deal prospectus.

On the coverage day analysts will issue their full reports on the company including earnings estimates and price targets.  They will also update the salesforce and the firm's clients on recent developments.

Some Examples:

Below we have Proteostasis Therapeutics (PTI - $16.85) which was a very difficult story to understand. On top of that their IPO was priced at $8 which was below the $12-14 proposed range. To make matters worse the shares broke the IPO price. There it sat in the dumps until March 7th when the brokers, particularly RBC came out with very strong "buy" ratings and price targets as high as $20/share. Investors took immediate notice. Since the shares were fairly illiquid the price action was outsized.

In contrast Intellia Therapeutics (NTLA - $26.64) was a very known quantity at the time of the IPO. It followed another company in the same space (EDIT - $28) that had done extremely well. In the case of NTLA investors were well-ahead of the analysts when they initiated coverage.

Here are some general guidelines:

  1. If the company has a strong story and runs up after pricing the analysts may have a hard time justifying "buy" ratings and price targets higher than where shares are trading already. This can be a downer for a stock, particularly if a strong lead bank like Goldman put's out a "hold" rating with a lower PT.
  2. Some companies despite having a strong story have trouble getting their IPO done at the proposed range and/or trade down post-IPO. This is sometimes the case during bad times in the market. Generally speaking the initiation of coverage will be a positive event for the shares since some refocused attention an what will probably be considered an "undervalued" name can create new investor interest.
  3. Another general category are smaller companies and less liquid offerings that can get largely ignored during their IPO. Often these are deeply specialized companies that might be hard for investors to do their own research on. In these cases analyst coverage, particularly from firms with reputations for industry expertise and research quality can have a big impact.

IPO Candy Coverage Alerts

Up until now we have mentioned the ending of quiet periods on an ad-hoc basis. But we have decided to launch a weekly email that provides those interested in these situations with a way to stay informed and take advantage of opportunities when the come up. Use the form below to sign up.