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Axovant’s Stock Coverage

AXON coverage

I’ve bemoaned the Axovant IPO here a couple of times already. Via Jean Fonteneau on Twitter (his full Axovant coverage is here), we have the chart at left. In case you were wondering how “research” and “recommendations” are done on a stock like this, well, this should provide as clear an example as anyone could want. What a lovely business.

24 comments on “Axovant’s Stock Coverage”

  1. Anonymous says:

    So basically the banks provide the “neutral and independent advice” to buy Axovant stocks – but only if they happen to be selling them as underwriters, otherwise they don’t bother to give any view or advice at all. I think this just tells you how self-interested and corrupt these guys are, and that nobody should listen to them nor buy what they are selling. But I don’t feel sorry for anyone that does.

  2. Anon says:

    Why is that the banks fault? No one is forcing you to buy the stock. And I don’t know what you call outperform, but >340% YTD sounds about right. The science may be faulty, but it has the same amount of risk as anything else in the same category.

  3. Anonymous says:

    Can’t someone make a potential fortune by shorting these stocks when they inevitably crash?

  4. Hap says:

    Because in theory, the banks are working for their customers (being paid to act in their interests). In most fields, if you have a duty to someone (say, an advisor doing research with students), your financial interests aren’t supposed to trump your interests to your clients, but…
    For more of this behavior, Michael Lewis’s Flash Boys provides examples (like being a broker and selling information on their trades to high-speed traders so that they can hose your clients). It should be surprising, but it’s not.

  5. biotechtoreador says:

    “Why is that the banks fault?”
    it’s the banks fault because it’s explicitly illegal.
    http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq
    Unfortunately, while a 3 year old could tell that firms engaged in this type of scheme, i.e. “give me a big banking fee and my analyst will give you a BUY rating”, FINRA, the SEC, and DOJ are oblivious. Or maybe it’s a coincidence that all the banks that got paid by AXON issued BUY ratings on the very first day they were legally allowed to do so (which has been decreased as part of the JOBS Act…)?
    It’s also truly shocking (though sadly becoming less and less so) just how many analysts are willing to lie to provide these buy ratings, cf. https://www.sec.gov/divisions/marketreg/mregacfaq0803.htm#parta. It’s a good paying job….

  6. MTK says:

    Do the investment firms fully disclose their financial interests at all times?
    If so, then I’d agree with @2. If not, well, that’s a problem.

  7. johnnyboy says:

    @5: define “fully disclose”. I’m sure the investment banks cover their asses by including the information somewhere in the hundreds and hundreds of legalese-written public documents they have to produce. If for each stock recommendation it takes hours and hours of combing through these docs in order to find out if someone got paid for it, it defeats the purpose of disclosure.
    But hey, I’m an investor, and I absolutely never look at investment bank analysts’ stock recommendations when making my decisions. Anyone who’s been paying attention since 2007 knows they’re drawing their numbers out of a hat.

  8. a. nonymaus says:

    Re: 6
    I don’t think it’s a hat that they’re pulling stuff out of.

  9. TOSG says:

    @6: Not saying it excuses them, but these kinds of things are always noted in the research report itself – and not in a way that’s hard to find or parse.

  10. Hap says:

    Basically they’re trying to sell access to other people’s money to the highest bidder, sort of like a security guard selling the opportunity to rob his employer to the highest bidder, or a bodyguard offering hitmen the opportunity to kill his client. So how do these people actually attract investors? The only hope for the clients of the investment banks is if they’re trying to treat the investments like a pyramid scheme, and hoping to sell them to someone dumber or slower. That sounds even riskier than normal.

  11. Anonymous says:

    People seem to miss the problem here, which is that equity research and investment recommendations are supposed to neutral and independent from the banks own interests, and even their clients. Banks are regulated to have chinese walls to prevent this kind of conflict of interest, but clearly it doesn’t work.

  12. Anonymous says:

    The solution is easy: If the banks say buy then sell, and vice versa. Or just ignore them altogether. Then nobody can argue that the banks are making a profit on the back of bad advice. We all know it’s bad advice, so don’t take it.

  13. jrftzgb says:

    hey the banks were right on the mortgage derivatives so they must be right on this.
    Wait, did I get that right?

  14. Hi, thank you for the mention on your blog.
    Just to chime in on the debate in the comment section, regardless of supposed chinese walls, regulations, etc… it is clear that Wall Street research is often influenced and potentially tainted by the investment banking side of the business where most of the money is made, that’s just a fact of life and a result of how the incentives are structured, one just has to be aware of it and take said research with a grain of salt.
    When pitching their services to a potential IPO client investment banks also pitch their research capacity and coverage, implying that they will also be offering positive(at least at the beginning) coverage of the stock.
    Also on the other side it would be awkward for them to turn around to initiate a negative coverage on a stock they just pitched to their investors clients to buy in the IPO, also “Sell” recommendations don’t sell stocks and they are in the business of selling stocks.
    So one just have to do his own due diligence and take Wall Street research for what it is.

  15. steve says:

    @14, you’re right about the reality but @6 is correct that there is supposed to be a wall between the sell and buy sides. SEC is clearly not up to the job of enforcing these banks as can be seen by the runup that occurs in so many stocks before news becomes public. They got Martha Stewart and some secretaries but seem to leave the big boys alone.

  16. Doctor Memory says:

    @3: well, kinda. Any idiot can predict that these stocks will crash back to earth post-IPO. The tricky part is successfully predicting when: short positions have a finite lifetime and if the stock is still trading high when it’s time to cover your short bet, you might find yourself in a rather uncomfortable situation.
    (Well, all of the above applies when normal humans short-sell stocks. Different rules entirely seem to apply at the large investment bank level, and sometimes they get to play the “heads I win, tails you lose” game called “naked shorting.” Fun times, if you find crime fascinating.)

  17. RockRat says:

    @16. A week or so before lock-up expiration is often a good time to initiate shorts of crap IPOs.

  18. wilber says:

    This is hardly a scientific way of analyzing the phenomenon. Is it not possible that the 5 underwriting banks actually do have a positive opinion about the company?
    If you really wanted to show a conflict of interest, you would look at all the companies that a bank underwrites (the denominator), and see if the investment bank always has a positive opinion of the stocks. I suppose it wouldn’t be surprising if they do, and that would indicate a conflict of interest, but showing that 5/5 investment banks who did the underwriting also have positive opinions doesn’t really clinch it.

  19. @18 Wilber
    Actually if you do the research on a large sample of IPOs you will see that 95%+ of initiation of research coverage from underwriters comes with a “Buy” “Outperform”…

  20. Anonymous says:

    @18: Except if the stocks were so good then 1) they didn’t set the IPO at the right price and would therefore be screwing their clients; and 2) they wouldn’t want to sell them and wouldn’t be advising others to buy them. So no, it’s not possible that they are such a good deal. The banks hype the buy *only* because they are selling, period.

  21. Hap says:

    I thought that the investment banks not only bought into stocks but also advised on investments for other people. If that’s true, they have two sets of clients (the people whose stocks they’re selling and the people whose money they’re taking to buy good stocks), and at least some of the time (like now), their interests are in conflict.

  22. Anonymous says:

    Figured it out. They are approaching investors with Alzheimer’s. Again and again and again…

  23. Orv says:

    I’ve heard that banks will often not make any recommendation rather than make a “sell” recommendation, because a “sell” can draw a lawsuit from the company whose stock is being panned.

  24. Douglas Kell says:

    http://www.barrypopik.com/index.php/new_york_city/entry/the_only_function_of_economic_forecasting_is_to_make_astrology_look_respect “The only function of economic forecasting is to make astrology look respectable”. The incompetence is bad enough, but the whole modern financial ‘profession’ is seemingly coupled to what is barely less than crookery (and would be if it were BIOLOGISTS peddling drugs for whose puffery they had been paid). Disgusting.

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