Over the most recent Christmas holidays, employees at Twitter (NYSE: TWTR) were in an especially happy mood as their company stock zoomed past the $70 mark.
All they needed was a bit of patience -- to wait until the calendar read May 6, 2014 -- to sell their shares.
But the stock market had other ideas.
A rising tide of outside investors was well aware that a huge amount of employee-owned stock would come to the market in early May, and a share sell-off began. By the time May 6 rolled around, shares had lost half of their value. That day in particular was very cruel for Twitter employees, as shares plunged 18% that morning alone.
The very next day, shares of cybersecurity firm FireEye (Nasdaq: FEYE) plunged from $37 to $29 as the company's employees were freed up to sell shares on that day. (The share price was also weighed down that day by a so-so quarterly report, though FEYE has made up for all the lost ground since then.)
Ever since Twitter and FireEye employees went through that gut-wrenching experience, employees at many other newly public firms are anxiously awaiting their chance to sell company shares, on a day known as the lockup expiration.
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And they have good reason to fear. Analysts at Goldman Sachs looked at 11,000 instances of such lockup expirations (including both initial public offerings (IPOs) and secondary public offerings) going back to 1995, and found that stocks tend to decline around 2% in the week prior through the day after the actual lockup expiration date. For tech stocks, that figure is a heftier 5%.
Now that Twitter lockup debacle has caught investors' attention, the herd has likely grown even more skittish about holding shares though this period. As a result, we may be looking at drops well in excess of that 5% figure with the group of companies that will soon face lockup expirations (which take place 180 days after an IPO or a secondary).
The actual date of the lockup expiration need not be so painful. Facebook (Nasdaq: FB) employees watched their stock move steadily lower in the days before they could sell, but the selling seems to have exhausted itself by the lockup date, and a relief rally ensued. Indeed, shares of Twitter have rallied roughly 20% since last month's lockup day, and better days may lie ahead.
The pattern of drops and gains around the lockup period leads to four trading implications:
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First, if you own a company that will soon face a lockup expiration, it may be wise to book profits. Second, if you're thinking of buying such a stock, it pays to examine when that lockup date will be, and perhaps wait until it has passed. Third, if you are so inclined, you may look at such recent IPOs as short sale candidates when they are just a few weeks away from the lockup expiration period. And fourth, you may want to look for rebound candidates among stocks that have suffered from the lockup speed bump, if their shares have taken a bad hit from the event.
With that in mind, here are stocks that will be facing lockup expirations over the next two months and are trading above their IPO price. Insiders and employees may be tempted to lock in gains as shares trade above the price that investment bankers gauged them to be worth.
Conversely, any newly public companies that have slipped below the IPO price may start to look like deep bargains, especially if they trade down further as the lockup date approaches. That makes them good candidates to put on your watch list.
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Risks to Consider: As we saw with Facebook, shares can actually rally on the lockup date, especially if they've been subject to heavy selling in prior days.
Action to Take --> The IPO market is once again open for business, as dozens of companies are expected to go public over the course of this month. That means that a slew of lockup expirations will occur near the end of this year. The key takeaway is that whenever there is a robust cycle for the IPO market, lockup expiration dates need to be closely monitored, regardless of whether you're on the long or short side of a trade.