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Twitter stock drops, as one major analyst says sell

(MoneyWatch) When Twitter's (TWTR) IPO took place in early November, less than a month ago, the stock opened at $45.10. Today it started at $40.78, facing a lot of Wall Street wariness.

Two of the banks that helped underwrite the IPO, Morgan Stanley and J.P. Morgan Chase, put the company on "hold" ratings, according to a Wall Street Journal report. Meanwhile, analyst Justin Post at Bank of America Merrill Lynch, actually gave the stock an "underperform" rating, essentially advising investors to sell shares, because of an "unattractive valuation" for the stock. His target is $36, a significant drop from even the current level.

Sell ratings are relatively rare, especially for an IPO stock, because analysts want and need access to corporate management to further examine a company and do their jobs. Issue a sell rating and management may not talk to the analyst any more.

What investors now see is likely the result of regulation intended to reduce the hyping of stocks that led to the tech bubble in the early 2000s. That regulation dictates that within a large bank, the equity analysts and the investment bankers are not supposed to collaborate. In addition, the analysts are forbidden from issuing reports on an IPO client until 25 days after it has gone public.

Today marks the first time that these analysts can publicly express their opinions about the stock, after the 25 day window. It just so happens that the average target they have, which means what they think the stock should rationally trade at over the next 12 to 18 months, is $41, which is roughly where it is trading today.

In the near future there will be new pressure on Twitter's stock. In a few months, insiders will be allowed to sell shares. The additional volume could then drive prices down even further.
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