The IPO frenzy in the first two quarters of the year means that we are on the brink of a lockup expiration frenzy. This could either mean a buying opportunity or a signal to stay away. I will explain some possible scenarios in this discussion over how to play lockup expirations.
For those of you who are unfamiliar with the terminology, I will explain what a lockup period/expiration is and why it is significant.
A lockup period follows a firm’s IPO, where it restricts some shares from being traded until 90 – 180 days after a firm debuts its shares to the public market. The restricted shares typically include employee stock options, executive owned shares, and early investors’ ownership. The reason for the lockup period is to prevent a massive sell-off in the first day of trading.
What this lockup period creates is a time when this expanded liquidity can be unleashed on the markets. The surge in liquidity could shoot a stock down with an overload of sell orders. With an increase in public float, a lockup expiration could trigger a buy from institutional investors with specific liquidity criteria for its investments.
Lockup expirations are on most shareholders' and traders' calendars as some attempt to profit off of this public knowledge. Regardless, stocks tend to slide around their expiration, typically dropping 1-3%, according to Market Beat.
Pinterest and Zoom released their restricted shares yesterday, and both have endured a recent price decline.
Pinterest (PINS - Free Report)
Pinterest has returned investors 6% since its IPO in April, with a substantial amount of volatility in between. PINS had a big EPS and sales beat in its most recent earnings in the beginning of August sending share prices surging roughly 20%.
The stock has tumbled 25% since the beginning of September in anticipation of the massive amount of free-floating shares that hit the markets yesterday. Short positions drove PINS down as shorts began to make up more of the outstanding shares over the past month.
PINS is now bouncing back, having gained almost 5% since noon yesterday as short-sellers cover and the number of evacuating investors levels-off. This stock is looking increasingly attractive as its price falls.
Its valuation is still quite high at 10x forward price-to-sales despite the company illustrating over 50% topline growth over the past 2 earnings as a public company. I wouldn’t try to catch this falling knife. Wait till the valuation further ripens to jump into PINS.
Zoom Video (ZM - Free Report)
ZM has traded up and down just like PINS. Following its most recent earnings in early September, the stock has plummeted over 28% as short-sellers bet against these aggressively valued shares. As of the end of September, over 25% of these shares were held short. I suspect that this figure has further grown going into ZM Lockup expiration.
ZM was sporting a 39x forward P/S at the beginning of September, which is substantially higher than the software industry's 6x. The stock has since fallen to a 25x forward P/S valuation, but we shouldn't be focused on valuations when looking at a company with such a healthy growth outlook.
Over its first two quarters as a public company Zoom Video illustrated around 100% year-over-year topline growth as well as profitability. This stock has had nothing but good news since it IPOed with a top and bottom-line beat in its first two earnings and continuous analysts’ revisions upward.
ZM is currently holding a Zacks Rank #2 (Buy) position and continues to look progressively more attractive as the shares fall in price. Today so far, the stock is down almost 6%. I wouldn't rush into this falling knife but would consider buying once a reversal is apparent.
(BYND - Free Report) , (UBER - Free Report) , LK, (CRWD - Free Report) , (FVRR - Free Report) , (CHWY - Free Report) , (WORK - Free Report) .
Lockup expirations typically indicate a marginal short-term downside for a stock, but it also opens up buying opportunities as this can lead to a stock being over-sold. In the upcoming expirations, keep an eye out for short-sellers loading up before the lockup period ends and how the stock has been performing thus far as these may provide clues into how the stock will react post expiration.
If there seem to be more short-sellers than the stock warrants, it could indicate that the stock is oversold and will only take a hair-trigger bump to get them all to cover and begin a rally. How the stock has performed could indicate how investors with restricted shares will react to their shares being freed up.
A stock that has seen good growth and robust long-term potential may not see a big sell-off on lockup expiration as investors hold positions for more significant gains in the future. A falling stock may be hit harder as investors seek liquidity, pushing the shares down further.
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