Why Shares of Zulily Inc Dropped and Then Popped

Is this meaningful? Or just another movement?

May 14, 2014 at 2:03PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zulily Inc (NASDAQ:ZU) were on a wild ride this morning, opening 10% lower and then surging as much as 14% higher than yesterday's closing price after its lockup period expired today. 

So what: Trading volume soared as insiders were allowed to sell shares for the first time since the flash-sales retailer's IPO six months ago -- nearly five times the average daily volume of shares had been sold by noon today. Over a million shares changed hands at market open, presumably as insiders dumped their holdings, but the stock quickly rallied after that on an apparent short squeeze. With Zulily's short interest at 63%, a majority of the market has been betting on the stock to fall, and those short-sellers were waiting to take advantage of the expected sell-off from the lockup period expiration, as posts on Twitter indicate. Once the market opened, the shorts began to cover their positions and take profits as the stock opened at its lowest point since the IPO.  

Now what: For Zulily shareholders invested for the long-term, today's movement is essentially noise. Short-sellers can take control of a stock and drive day-to-day fluctuations in its price, but ultimately the stock will rise or fall based on the company's underlying profits. Similarly, investors in recent IPOs should be aware of their lockup expiration dates, which generally come six months after the IPO, as the end of a lockup can trigger a sell-off -- though as a one-time event it shouldn't affect the long-term direction of the stock. Even before today's swing, the stock has been highly volatile, spiking in February to over $70 on an earnings beat and then falling to less than $30 this morning. With the stock's sky-high P/E ratio and a huge short interest, about the only thing shareholders are assured of is more double-digit swings like today's.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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