Imagine that you work for a start-up that goes public. A hefty portion of your wealth is tied up in company stock, and you can't wait to diversify your portfolio by selling off some shares. But, even though your company completed its initial public offering, you still have to wait for a "lockup period" to expire. This lockup period often lasts around 180 days, and when it occurs, the share price can suffer a sell off. Let's take a deeper look at just how much of a hit, and what stocks are heading toward this significant date.
Past lockup period price pressures
When LinkedIn (NYSE: LNKD) first went public in May 2011, a total of about 8 million shares were available to trade, and it closed its first day of trading at $94.25 per share. After 180 days, its lockup period expired and it issued a secondary offering, bringing a total of 32 million more shares available to trade. In the week following the lockup expiration, LinkedIn dropped to a low of $59.07. Other examples include Tesla Motors, which dropped over 15% the day its lockup period expired in Dec. 2010, and A123 Systems, which dropped over 6% in at its expiration in March 2010.
Now, this doesn't always occur, and if you are a long-term investor, the short period of depressed prices after the lockup expiration will just mean another opportunity to buy more shares. Take LinkedIn, which now hovers around $100 per share. Investing at its lows around the lockup expiration would have netted a 50% return compared to the market's 10% return.
Is your stock next?
If you are investing in a recent IPO, take note of when its lockup period expires. This date is usually written in its SEC filings, and you can also see which company's lockup periods expire by month at the SEC's EDGAR database. What big names are expiring in the near future?
|
Company |
Lockup Expiration Date |
|---|---|
| Jive Software (Nasdaq: JIVE) | June 11 |
| Laredo Petroleum (NYSE: LPI) | June 12 |
| Michael Kors (NYSE: KORS) | June 12 |
| Zynga (Nasdaq: ZNGA) | June 13 |
Source: EDGAR Online.
Jive Software offers social networks for enterprise customers, and it reported first-quarter revenue growth of 58% over last year. Jive still had a net loss of $8.9 million for the quarter, which was an improvement from last year's first-quarter loss of $14.5 million. Since its IPO in December, Jive's share price is up over 15%.
Laredo Petroleum explores and develops for oil and natural gas, and it increased its production 35% from the previous year. Revenues followed, with a 40% jump over last year to $150.3 million, and with a net income of $26.2 million for the quarter. After its December IPO, Laredo's stock is up over 20%.
Fashion designer Michael Kors actually already danced around its lockup period, as the banks who underwrote its IPO allowed for insiders to sell early. This means the upcoming lockup expiration might not spell the usual despair, because executives and board members have already sold $1 billion in shares. And even with cashing in early, Kors shares are up over 60% since its December IPO.
Zynga, the social game creator that directly or indirectly brought in 19% of Facebook's revenue in 2011, recently took a hit after Facebook's IPO. Blurring the line between reality and the virtual world, Zynga and American Express will offer a Farmville branded prepaid card. This will allow users to spend rewards earned for using the card to buy virtual goods in Zynga games. Zynga remains down over 25% since going public in December.
Keep it in your calendar
As shown, the flood of shares set free from restrictions can adversely affect your portfolio, but if you have faith in the company's long-term prospects, it could give you a great opportunity to grab more shares from insiders looking to cash in a little stock.
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