IPO Quiet Period Trades May Bring Loud Returns

Since its high-profile IPO on May 19, shares of LinkedIn (NYSE:LNKD) have had a steady fall — they have gone from $122.70 to a low of $60.14.

But on Tuesday, the bulls rushed into the stock, as the price surged by 12% to $85.56. While the overall rally in the equities markets was a help, the major factor was the expiration of the so-called “quiet period” — the last 40 days after the IPO, after which Wall Street underwriters can initiate research.

As should be no surprise, LinkedIn got glowing coverage. There were buy ratings from firms like UBS, Morgan Stanley, JPMorgan and Bank of America.

So does it make sense for investors to play the quiet period with other IPO stocks? This was actually a smart strategy during the dot-com boom of the late 1990s. By purchasing recently new stocks a couple days before the expiration of the quiet period, investors would often reap hefty returns.

However, in 2003, a global settlement with the Securities and Exchange Commission and 10 top investment banks helped minimize the inherent conflict of interests with IPOs. To this end, the quiet period was extended from 30 to 40 days. Also, analysts were forbidden from attending underwriting meetings with IPO companies as well as from getting incentive compensation for their research. Basically, there would be a “Chinese Wall” between the investment bankers and the analysts.

While these efforts were laudatory, they are far from fool-proof. Keep in mind that Wall Street firms are desperately trying to get hot tech clients. In other words, don’t you think analysts might want to focus on the positives of an IPO? It definitely seems reasonable. Thus, for investors looking to cash in on leading-edge tech companies, buying ahead of the quiet period is probably a sound strategy.

What are some other IPOs that might benefit? The expiration for Pandora (NYSE:P) is on July 25. Its underwriters include Morgan Stanley, JP Morgan and Citigroup, which certainly have lots of firepower from its analysts.

Another one to look at is Fusion-io (NYSE:FIO), which is a fast-growing storage company (its largest customer is Facebook). The company’s quiet period expires July 19.

However, the quiet-period strategy may have the best results with upcoming high-profile IPOs. These would include Zynga, Twitter, Facebook and perhaps even Groupon.

For traders who like to take a flier on something that’s worked in the past, it’s probably a good idea to mark your calendars.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.