When a company takes its shares public for the first time, investors often clamor to climb on board, hoping to get in on the ground floor before the stock soars. But shares in an IPO, or Initial Public Offering, only account for a small fraction of ownership -- the remainder belongs to company management, founders, and venture capitalists.
As insiders, they're privy to intel most of us can't access, giving them an advantage over your average investor.
So if IPO insiders are heading for the exit sign, it's possible that they know something you don't.
As a precautionary measure, underwriters almost always require a lock-up period on an IPO, a set amount of time insiders must wait before they can sell their shares on the market. Insiders hold a disproportionate amount of power over the fate of the stock -- so if a single large shareholder decides to unload his shares, its price could come tumbling down. The lock-up period prevents insiders from flooding the market and skewing share price.
However, the lock-up period usually only lasts from four to six months after the initial public offering -- at which point, insiders can do as they please. Some insider selling is to be expected -- upon expiration of the lock-up period, stock prices typically see a permanent drop of about 1%-3%.
But excessive selling by company insiders should raise a red flag -- if they're racing to cash out their shares, it's not a good sign of things to come. They may have intel on company earnings, or other data sending them running for the door.
So how can you tell if an IPO a simply an exit strategy for company insiders? To help you find ideas, we scanned insider trades of recent IPOs, and identified the IPOs that insiders have been dumping. We also identified a few recent IPOs that have seen significant insider buying, which could be a good sign for long-term investors.
As always, use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
Long-Term Growth Potential? Top IPO Insider Buys Over the Last Six Months:
1. Complete Genomics
2. Hudson Pacific Properties
3. Chesapeake Lodging Trust
Insiders Looking For an Exit? Top IPO Insider Sales Over the Last Six Months:
1. Gain Capital Holdings
2. Body Central
3. The Fresh Market
4. Vera Bradley
*Please note: Investing in IPOs is an extremely risky strategy. The volatility of these investments can be extreme -- so only analyze these companies if you believe you have an above-average tolerance for risk and investment losses. Insider trading data sourced from Yahoo! Finance.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.