Yesterday, online radio company Pandora went public in a wildly popular IPO.The stock was priced at $16 and quickly traded up to the low $20s before settling around $18. (This means that the underwriters priced it correctly–for which they deserve kudos).
And now, today, in a startling and rare move, a Wall Street analyst has already come out and slapped a SELL rating on Pandora–with a $5.50 price target.
You don’t see SELL ratings very often on Wall Street. There are lots of reasons for this, most of which have nothing to do with the “banking conflict” that is usually blamed for the dearth of SELLs.
The reasons include:
- Most stocks–especially growth stocks–generally trend up over the long haul, so saying SELL often means betting against the odds and/or making a short-term timing call.
- Stocks with excellent fundamentals don’t often go down just because they’re “expensive”–instead, they just get more expensive. So saying “SELL” based solely on valuation often sets the analyst up to be wrong.
- The lack of SELL ratings makes SELL ratings sound like a complete condemnation of the company, to the point where it seems the analyst has a vendetta against it. The more polite way to tell people to sell, most folks on Wall Street whisper, is to say “hold”–or just ignore the stock altogether.
- The issuance of a SELL rating often drives a stock down, hurting investors who own it. These investors will not usually say “thank you.” Instead, they’ll want your head.
- Most investors are long-only, meaning they can only buy stocks, not short them. Thus, “SELL” ratings are only useful to hedge funds and investors who already own stocks.
- Most companies refuse to talk to analysts who hit them with SELL ratings, thus reducing the analyst’s ability to gather information about the company.
And so on…
There’s also an unspoken sense of decorum on Wall Street around “crapping on someone else’s deal.” And pasting a SELL on a company that went public yesterday is very much crapping on someone else’s deal.
Fortunately, in recent years, the explosion of blogs and independent press and independent research has made it more common to hear the word SELL.
And, today, Richard Greenfield, an analyst at BTIG, shouted it from the rooftops.
He also amplified his call by putting a $5.50 price on a $17 stock.
A few hours later, Pandora is down 20%–in the $14s. Anyone who bought Pandora yesterday at $17 or above has lost money. The company and its underwriters and its IPO buyers are probably furious. There are presumably little voodoo dolls of Greenfield all over traders’ desks that are being stabbed with pins and needles.
But everyone who doesn’t have the misfortune of owning Pandora should salute Greenfield’s cojones and tell him a nice big “thank you!”
Because even if he is dead wrong about the stock, which he may or may not be (time will tell), Richard Greenfield has done every Pandora investor and potential Pandora investor a favour. He has, in fact, done what all helpful analysts do: He has helped investors evaluate Pandora as an investment.
Richard Greenfield thinks Pandora will trade down to $5.50. That should make anyone who is considering buying Pandora at $14 (or higher) think twice.
Importantly, it should not necessarily dissuade anyone from buying Pandora at $14. Richard Greenfield is only one person, no one knows what Pandora is worth, and every investor needs to make their own decisions.
But it should help investors test their own logic and convictions.
And that’s all analysts can really do to help anyone.
Also, the more SELL ratings that are issued, the sooner the SELL rating “taboos” will be eliminated.
So let’s hear it for Richard Greenfield!
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