Bear Stearns Gives a Little B2B Stock a Nice Ride

All hail Kaushik Shridharani, the God of Plenty.

OK, maybe he's not the God of Plenty. The Bear Stearns analyst did, however, have the power to bestow some serious riches on shareholders in tiny B2B stock Opus360 (OPUS Quote) Tuesday morning when he initiated coverage with a buy rating.

Shridharani's mention of the stock in the same breath with industry leaders Ariba (ARBA Quote), CommerceOne (CMRC Quote) and FreeMarkets (FMKT Quote) added octane to Opus360 shares.

Bloom County Opus360's strong Tuesday

Source: BigCharts

How much? Opus360 opened at about 5, and at one point this morning rose to 5 1/4, after closing Monday at 2 3/8. On Tuesday, it traded 5 million shares, just a smidgen above its average daily volume of 122,000. It closed at 4 5/16, up a ridiculous 81.5% for the day.

And at a time when analysts' independence is constantly questioned because of investment banking ties to public companies, Shridharani's call will likely be controversial because Bear had been one of Opus360's bankers at its initial public offering. The fact that it was trading for around 2 when the report hit only heightens the criticism.

"It's wild that Bear would recommend such a low-priced stock. It's not even marginable," says David Schultz, who runs Summit Capital Holdings. "It's a big sponsorship from a big firm. The guy's kind of stuck. If he really likes the company, he knows he's going to move it (with the report)."

On the surface, there's some sense to the call. Shridharani put out a research note recommending six B2B stocks. But, that list included Ariba, which has a market cap of roughly $34 billion and Commerce One, whose market cap is $8 billion. Also on this morning's list were Clarus (CLRS Quote) and Global Source (GSOL Quote). Opus360's market cap is $219 million; that's million, with a "m". Shridharani didn't return a call seeking comment.

Also, based on information from BigDough, which tracks institutional stock ownership, Bear Stearns was holding 1,990 Opus360 shares as of June 30. At Monday's close, that stake was worth just over $4,000; halfway through the Tuesday session, it would have been worth almost $9,000.

Now, those numbers are spare change to Bear Stearns and its unlikely the firm would stake its reputation -- a bit tarnished but mainly intact -- on pumping and dumping a $2 stock.

Swift Reaction

Shridharani's estimates were not unreasonable compared to those of his peers, though the two other analysts following the stock were from Robertson Stephens, Opus360's lead underwriter and J.P. Morgan, a co-manager on its IPO. Both rate the stock a buy, and J.P. Morgan's price target on the stock is $15, more than double Shridharani's one-year price target of $7.

William Epifanio, J.P. Morgan's analyst on the stock, says that while he also thinks Opus360 has a large opportunity in front of it, he wonders what catalysts will be able to keep the stock on its current perch. At its high on Tuesday, the stock traded at 5 1/4, or 120% higher than where it closed Monday night.

"The question is whether investors will sustain its new level and push it forward," he says.

Opus360 helps businesses find free-lancers and independent contractors for special projects through its FreeAgent.com Web site. It also sells software to help manage those relationships. So basically, it's running an online exchange focused on services, instead of an exchange focused on goods, which is what most B2B marketplaces, to this point, do.

And at first blush, the numbers in Opus360's most recent quarterly report look outstanding. How does 135% sequential revenue growth sound, or gross margins of 81%? What investors need to keep in mind, though, is that those figures are derived from total revenue in the quarter of just $2.3 million. Even PurchasePro.com (PPRO Quote), which, at a $1.2 billion market cap is one of the smaller B2B companies followed by top-tier Wall Street analysts, had revenue of $9.5 million in the most recent quarter.

That said, is Opus360 comparable to, say, an Ariba?

"My God, no," Epifanio says. "I'd love to be able to say yes, and so would Opus. But with Ariba, you've got a much more mature company, on so many different levels, it's an apples to oranges comparison." (Epifanio rates Ariba a buy, and his firm hasn't performed underwriting for the company.)

Either way, money manager Schultz's advice is to stay away. "When you see a little stock up two points on a good recommendation, let the wind blow by," he says. "Clearly you don't want to buy that stock today."

Clearly some enjoyed selling it.