Over the last couple of weeks we have seen various Internet stocks hit their lock-up expiration date, with traders attempting to lock in a “sure thing” along the way.
HOW IT WORKS
Whenever a company goes public the SEC requires that certain investors not sell their shares for a specified period of time. One of the reasons a lock-up is placed on certain shareholders is to prevent an unloading of massive volume upon the IPO, potentially destroying the value of the stock for other shareholders.
Shares of Facebook (FB) fell 7% during trading on the day one of its lock-ups expired, closing out August 16 down 4%. Many traders view these expirations as a guaranteed way to make money as they view the event as having built-in sellers just waiting to hit the market. This seemed to have played out as many market participants expected for Facebook, which had already been experiencing lackluster performance since its May IPO.
YELP ACTION
Over the past week traders attempted to reenact the drop in Facebook in shares of Yelp (YELP). Except traders didn’t see the short squeeze coming when shares of Yelp jumped 20% on its lock-up expiration day. According to a recent Wall Street Journal article and data from FactSet, 39% of shares outstanding were sold short going into August 29, the day the selling ban was lifted on Yelp shares, a sign of people looking for that “sure thing.”
DON’T FOLLOW THE CROWD
The lesson to be learned here is that trading isn’t easy.
Whenever the crowd feels they know a stock will be heading in a certain direction, there is a pretty good chance the crowd is wrong.
This doesn’t mean money can’t be made in lock-up expirations, but it does mean more due diligence needs to be done. You’ll more times than not have better luck placing your money on red on a roulette wheel than relying on a “sure thing” trading strategy without further justification backing it up.
[Editor’s note: Looking for trades for your watch list? Check out the Markets on the Move section here, which offers new stories every morning.]
