Buffalo Wild Wings

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By mrchw
May 19, 2004

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For those of you who don't know, the BWLD lockup period ends today. So Insiders can now sell. I thought that anticipation of this day is what was driving the price lower the past few days, and apparently this is true. I wish I'd done this research 6 days ago! Anyway, I posted this over on the Hidden Gems boards as well in response to a question on the lock up...

Personally, I don't think the lock up period is that big of a deal. Stocks don't just magically fall 25% because insiders start to sell. Theoretically, if you believe that markets are efficient, the lock up period should have no effect. The market should anticipate it, and when the day comes, it should be a non-event.

Well, that's if you believe the market is totally efficient. Which I definitely don't. Because if I did, I wouldn't bother to try to beat the market. But I also feel that the pure supply and demand issues around a lockup would drive the price down slightly. And it might create a good buying opportunity...

So I did a little looking into the issue. Here's some interesting reading:

1.) Stern School of Business Paper discussion on the subject.

This is 40 pages of heavy academics. I wouldn't recommend reading it all. But the abstract is quite interesting, and so are the charts at the end. Especially pages 38 and 39. You'll notice on these charts that the majority of a decline comes in the 5 days preceding the lock up day. However, there is a still a slight negative return 20 days out. The authors use this as proof of the market's inefficiency. I would agree.

Now, that graph looks ugly, but make sure you check out the scale! It's a total of a 2.5% market underperformance over the 20 days before and after the IPO lockup. Let's look at BWLD over the same period, using SPY as a proxy for the S&P500:

Ticker       Date      Price        Date           Price      Return
BWLD     19-Apr     27.4      18-May      29.33      7.04%
SPY         19-Apr    113.83    18-May     109.74     -3.59%

So BWLD has outperformed the S&P by 10.63%, over the same period when the average IPO underperforms by 2.5%. Interesting, thats 13+% better than the average IPO. So does that mean BWLD is going to fall 13% tomorrow? I doubt it, although after hours it's down 2% more.

So getting back to the report, the majority of the underperformance comes the 5 days prior to lock up expiration day. Let's examine BWLD in this case:

Ticker    Date           Price        Date            Price        Return
BWLD   11-May      34.05      18-May       29.33     -13.86%
SPY      11-May     109.75      18-May      109.74      -0.01%

Wow, what a difference this makes. This makes BWLD look much WORSE than the typical IPO. While the Typical IPO trails the S&P500 by 2.5% during these 5 days, BWLD trails it by almost 14%, or over 11% underperformance.

On to article number 2:

According to this Business 2.0 article, a survey of 70 stocks fell 11.2 percent on average over the 4 days before and the 4 days after the expiration day (so we're on day 5 today of the 9 day period for BWLD):

Here's the surprise. Most of the action occurred before the expiration date. Sixty stocks lost value in the four days prior to the lockup release. The group of 70 stocks dropped, on average, 8.9 percent. Nothing much happened after the expiration when insiders could dump their stock. Only 38 stocks fell in the four days following the expiration, and the group lost only 2.5 percent, on average. The lockup expiration was a non-event because insiders didn't sell.

So for the 4 days prior to the lock up day:

Ticker    Date           Price      Date            Price       Return
BWLD   11-May      32.6      18-May      29.33      -10.03%

BWLD is approximately equal to the average IPO, falling a little more than most.

Now, let me point out one flaw with these two articles. They are from around the top of the bubble (just before and just after). During this period, IPOs were quite prevalent, and they might not be representative of an IPO in today's market.

So what's the conclusion? Well, decide for yourself. I believe that BWLD had an earnings report the drove the price of the stock up insanely high (maxing out around $34). This price movement makes it look very good on the 20-day compare and very bad on the 5-day compare. However, it's average on the 4 day compare from the 2nd article, but below average if you go back 4 days on the first article (above average or good means better performance than the typical IPO, below average or bad means worse performance). I think we've seen the majority of a potential drop already, however.


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