Lockup Expirations Looming: Stocks To Focus On
Zacks Investment Research | Oct 16, 2019 04:37AM ET
The IPO frenzy in the first two quarters of the year means that we are on the brink of a lockup expiration frenzy. This could either mean a buying opportunity or a signal to stay away. I will explain some possible scenarios in this discussion over how to play lockup expirations.
For those of you who are unfamiliar with the terminology, I will explain what a lockup period/expiration is and why it is significant.
A lockup period follows a firm’s IPO, where it restricts some shares from being traded until 90 – 180 days after a firm debuts its shares to the public market. The restricted shares typically include employee stock options, executive owned shares, and early investors’ ownership. The reason for the lockup period is to prevent a massive sell-off in the first day of trading.
What this lockup period creates is a time when this expanded liquidity can be unleashed on the markets. The surge in liquidity could shoot a stock down with an overload of sell orders. With an increase in public float, a lockup expiration could trigger a buy from institutional investors with specific liquidity criteria for its investments.
Lockup expirations are on most shareholders' and traders' calendars as some attempt to profit off of this public knowledge. Regardless, stocks tend to slide around their expiration, typically dropping 1-3%, according to Market Beat.
Pinterest (NYSE:PINS) and Zoom released their restricted shares yesterday, and both have endured a recent price decline.
Pinterest (PINS)
Pinterest has returned investors 6% since its IPO in April, with a substantial amount of volatility in between. PINS had a big EPS and sales beat in its most recent earnings in the beginning of August sending share prices surging roughly 20%.
The stock has tumbled 25% since the beginning of September in anticipation of the massive amount of free-floating shares that hit the markets yesterday. Short positions drove PINS down as shorts began to make up more of the outstanding shares over the past month.
PINS is now bouncing back, having gained almost 5% since noon yesterday as short-sellers cover and the number of evacuating investors levels-off. This stock is looking increasingly attractive as its price falls.
Its valuation is still quite high at 10x forward price-to-sales despite the company illustrating over 50% topline growth over the past 2 earnings as a public company. I wouldn’t try to catch this falling knife. Wait till the valuation further ripens to jump into PINS.
Get The News You Want
Zoom Video (ZM)
ZM has traded up and down just like PINS. Following its most recent earnings in early September, the stock has plummeted over 28% as short-sellers bet against these aggressively valued shares. As of the end of September, over 25% of these shares were held short. I suspect that this figure has further grown going into ZM Lockup expiration.
ZM was sporting a 39x forward P/S at the beginning of September, which is substantially higher than the software industry's 6x. The stock has since fallen to a 25x forward P/S valuation, but we shouldn't be focused on valuations when looking at a company with such a healthy growth outlook.
Over its first two quarters as a public company Zoom Video illustrated around 100% year-over-year topline growth as well as profitability. This stock has had nothing but good news since it IPOed with a top and bottom-line beat in its first two earnings and continuous analysts’ revisions upward.
ZM is currently holding a Zacks Rank #2 (Buy) position and continues to look progressively more attractive as the shares fall in price. Today so far, the stock is down almost 6%. I wouldn't rush into this falling knife but would consider buying once a reversal is apparent.
Upcoming Expirations
BYND, UBER, LK, CRWD, FVRR, CHWY, WORK.
Take Away
Lockup expirations typically indicate a marginal short-term downside for a stock, but it also opens up buying opportunities as this can lead to a stock being over-sold. In the upcoming expirations, keep an eye out for short-sellers loading up before the lockup period ends and how the stock has been performing thus far as these may provide clues into how the stock will react post expiration.
If there seem to be more short-sellers than the stock warrants, it could indicate that the stock is oversold and will only take a hair-trigger bump to get them all to cover and begin a rally. How the stock has performed could indicate how investors with restricted shares will react to their shares being freed up.
A stock that has seen good growth and robust long-term potential may not see a big sell-off on lockup expiration as investors hold positions for more significant gains in the future. A falling stock may be hit harder as investors seek liquidity, pushing the shares down further.
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our just-released Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
Zacks Investment Research
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.