Insiders and directors of
have to be pleased with how their stock has performed since
in May. A solid 64% gain in the past six months (while the Nasdaq
has shed 7%) makes it one of the best performing initial public
offerings (IPOs) of 2011.
But when the board of directors was recently giving a final
check-off on third-quarter results, they spotted a potential
problem looming on the calendar. In mid-November, the insiders who
were "locked-up" and prevented from selling all of their pre-IPO
stock got the green light as the 180-day restriction period
The Board had ample reason to worry. One of the reasons the stock
has performed so well is the scarcity factor: Only 7.84 million
were sold to the public in May, well below the actual demand for
shares. It's axiomatic to note that a stock price is simply a
function of supply and demand -- everything else is noise. With the
lock-up expiration looming, a new supply of stock (8.7 million
shares) looked set to meet or exceed demand.
In response, LinkedIn took the absurd step of kicking the ball down
the road. As part of a just-announced secondary share offering, the
restriction on insiders has been put in place for another 90 days.
But this just forestalls the inevitable.
Indeed, another dozen companies are facing the "lock-up expiration"
headwind between now and the end of the year. Buying these stocks
in advance of newly-released stock could be quite risky, and if you
own them, then be prepared for possibly bumpy trading ahead.
Many more shares of Russian search engine provider
, for example, will be released this coming Monday, Nov. 21. In
anticipation, shares may already be coming under pressure. Daily
has surged this week and shares may be weakening as a result of
concerns about next week's lock-up expiration.
The key is to focus on how the stock has traded since the
and how many shares might still come on the
. For lagging 2011 IPOs such as
Lone Pine Resources (NYSE:
Vanguard Health Systems (NYSE:
, insiders might simply look to hold tight and unload shares down
the road at (hopefully) higher prices.
For the best-performing IPOs of 2011, the temptation to sell at
higher-than-IPO prices must be tremendously tempting. Insiders at
HomeAway Inc. (Nasdaq:
saw their stakes in the company soar in late June when the stock
debuted at $27 a share and finished the first day of trading above
$40. Shares have since cooled to $32, but remain at such seemingly
expensive levels that insiders may be tempted to sell a lot of
stock as soon as they are legally allowed.
HomeAway has rolled up on the online vacation-rental space through
a spate of acquisitions. An ongoing string of deals helped the
company to boost second-quarter sales (its first quarter as a
) 41% to $59 million. This growth rate slowed to 37% in the third
quarter to $61 million, and in the absence of fewer recent deals,
sales growth is expected to steadily come down about 10% in the
That's not to say the
is petering out, but only that the strongest growth has likely
passed, and analysts will probably start thinking of HomeAway as a
moderate organic growth story. Meanwhile, the stock trades for more
than nine times projected 2012 sales and a hefty 57 times projected
earnings per share (
. And, like LinkedIn, the scarcity factor may account for this
stock's appeal thus far -- just 10% of all shares currently trade
. So as a lot more stock hits the market, the selling pressure is
likely to be a lot stronger than the buying pressure.
Nearly three weeks ago,
this maker of computer storage-device stock was ripe for a
Instead, a solid
that has pushed the stock up from the $30 range to about $40. My
timing was off, as the short thesis was predicated on events that
would likely take place this winter: "Rivals such as
are preparing their own rollouts of flash-storage devices, and they
have much deeper and long-standing customer relationships," I wrote
in late October.
Was that forecast flat wrong? Not according to some analysts.
"Fusion-io has a lead now ... but as competitors come into the
market, Fusion-io's lead will diminish," noted Merriman Capital's
Kaushik Roy in a Nov. 4 note to clients. He has a "sell" rating on
the stock and a
between $15-18, well below the current $40 price. More competition
inevitably yields price wars, and Roy adds that "Fusion-io has
already dropped prices for its next-generation products, but the
competitors are starting to sell at less than half of Fusion-io
As a key concern for short-sellers, some analysts predict Fusion-io
may deliver another strong quarter or two this winter. But they
also predict problems heading into 2012.
The recent rally in the stock may be partially due to a low amount
of shares being traded: only 12% of the company's total share count
can be freely traded. "Shares have performed well since our
initiation, in our view partially benefiting from a thin float that
was heavily shorted, neither anticipating the strength of a solid
quarter nor the volatile reaction of the stock given the lack of
liquidity," note analysts at Sterne Agee.
Will this all change on Dec. 5, when the other 88% of the company's
stock will become unrestricted? Time will tell. Analysts at Sterne
Agee suspect results in the current quarter may help shares stay
aloft, but they still see them falling down to $22 over the course
Risks to Consider:
Insiders and directors have the right to sell shares when these
lock-up periods expire, but because they may hold off doing so for
a little longer, these lock-up dates shouldn't be used as a
Action to Take -->
Investors should keep a close watch on these names before taking
any action. A steadily-expanding supply of shares during the course
of 2012 as insider-held stock dribbles out will surely an effect on
these stocks. If you own any of these stocks, they may be worth
selling right now in anticipation of this "lock-up" expiration --
or worth shorting on the way down. If shares fall as a result, then
these IPOs may actually be worth a second look at (presumably)
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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