Shares of Facebook (FB) hit a fresh all-time low, falling as much as 6.5% in early trading after the company's insider lockup period expired. As many as 271 million shares could potentially hit the market today. It's the first of a series of expirations that could result in almost 2-billion shares being released to the public over the next two years.
Facebook currently has 420 million shares in the public markets. With a lack of demand having already cut FB shares almost in half, the prospect of more supply is horrifying to those hearty few that are still long. Breakout spoke to Jon Najarian of OptionMonster.com about the implications of the release of additional shares. [Note: Najarian has a long position in FB]
"The single biggest thing it might do is make it less expensive to be short Facebook," Najarian says to the likely horror of the bulls. He's referring to how much brokerages charge customers to execute a short. For a company like IBM (IBM), with a massive float and little zealous shorting, the price to borrow is low. For companies with relatively low floats and horrendous prospects, being a bear gets more expensive.
For companies like Groupon (GRPN) and Yelp (YELP) where the floats are small and prospects viewed as dim, Najarian says getting a borrow can cost as much as half the face value of the stock itself. At such a price the stock would have to drop 50% before the bear makes money; an unattractive risk/reward set up for most.
Najarian thinks the Facebook un-Likers making bearish bets on the end of the lockup are off base. Just because the venture capitalists and select insiders can sell their shares doesn't mean they will. Some, like Microsoft (MSFT), which has more than 26 million shares getting freed, already said they have no plans to sell. Other holders may not need the liquidity or even think FB shares are undervalued. Seriously.
Unless a good portion of the 271 million shares up for sale get dumped into the market, Facebook shorts can get caught in a classic Short Squeeze. "Perhaps it's going to be a little cheaper for them to be short going forward on the borrow side but if the selling pressure doesn't hit, a lot these shorts are going to scramble," he says.
Najarian, who correctly forecast a Facebook rally last June, is playing the shares from the long side again. He's estimating the stock could move as high as $26 or $27 if the bears get snagged.
Sometimes the less obvious trades have the most potential. In the case of Facebook, it's not in the least bit clear getting long ahead of another quarter billion shares potentially coming to market this week is counter-intuitive, to say the least.
Be sure to check out details of Jon's upcoming Invest Like a Monster conference in September.
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