On Monday, October 28, the 25 day underwriter research quiet period following Potbelly's (NASDAQ:PBPB) October 3 IPO will expire; there is a strong likelihood that a short-term increase in PBPB's price will occur in the days surrounding the 28th as a result of the release of positive research into the market on the part of the firm's underwriters. The underwriters, including BofA Merrill Lynch (BAC), Goldman Sachs (GS), Baird, Piper Jaffray (PJC), and William Blair, will look to capitalize on the stock's spectacular early performance with strong research reports.
The past two years of our work, along with solid academic studies, have empirically demonstrated a correlation between the visibility and number of IPO underwriters and an increasing stock price at the close of the quiet period. The price increase will typically begin a few days before the expiration of the quiet period in anticipation of positive research reports - investors realize that the underwriters' reports will be generally positive, since it would hardly make sense for underwriters to release negative information about one of the companies they underwrote. Since Potbelly's stock is already on the rise, this may manifest in an accelerated increase in price in the next few days.
CONCLUSION
PBPB has seen steadily increasing prices since mid-October after a significant drop in the two weeks following the IPO. The price drop was likely a return to earth after the stock's astronomical early rise; the IPO priced at $14.00, above and beyond the $12-13 expected price range, and then saw a 120% increase on its first day of trading. The stock hit a high point of $33.90 before beginning its steady decline to a low of $23.76; it has since improved gradually, closing at $29.23 on October 23. Though PBPB has certainly outperformed the expectations of the IPO, the price has hardly been stable, and the market clearly hasn't settled on the firm's value yet, so investors looking to take advantage of the end of the quiet period should keep a careful eye on the price in the coming weeks.
BUSINESS
Potbelly is an owner, operator and franchiser of a neighborhood sandwich shop concept; as of June 30, the firm operated 280 shops and had franchised six shops spread across 18 states and the District of Colombia, with an additional 12 franchises in the Middle East. The firm is a "fast-casual" restaurant (essentially a short step above fast food), meaning that it faces competition from other fast-casual concepts including Jimmy John's, Subway, Chipotle Mexican Grill (CMG), and Panera Bread (PNRA); it also must compete with fast food giants like McDonald's (MCD) and Burger King (BKW).
MANAGEMENT
Potbelly's senior executive team averages over 17 years in the restaurant industry, and the core of the senior executive team has remained entirely intact since the 2008 hiring of President and CEO Aylwin Lewis. Aylwin previously worked as President and Chief Multibranding and Operating Officer of Yum! Brands, Inc. from 1991 to 2004, and has also served as the President and CEO of Sears Holdings.
Disclosure: I am long PBPB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
