On Monday, December 9, the 25-day underwriter research quiet period required by the SEC after the November 14 IPO of Zulily Inc (ZU) will expire, permitting the firm's underwriters to release positive research reports on the mom-oriented flash retail website into the market and likely providing a boost to the price of the firm's shares.
The firm had an extremely successful IPO, pricing above an already upsized expected range of $18-$20 at $22 per share, and buyers were rewarded with an explosive first day return of 71.4%. The stock has since cooled somewhat, falling from a peak of $41.32 per share to as low as $34.19 per share; it closed at $35.03 on December 3rd,
The underwriters, including the prestigious group of Goldman Sachs, Citigroup Global Markets, BofA Merrill Lynch, William Blair, Allen & Company, and RBC Capital Markets, will seek to reverse the recent downward trend with the release of positive detailed reports to their thousands of institutional and retail clients into the market upon the expiration of the quiet period on December 9th.
Academic published papers and the results of our own recent extensive research over the past two years have given empirical evidence to a correlation between the quantity, quality and visibility of a firm's IPO underwriters and the rise in the price of the firm's shares at the conclusion of the quiet period and the period leading up to the conclusion of the quiet period.
For example, extensive studies by our friend Professor Daniel Bradley, PH.D, C.F.A. at the University of South Florida in Tampa have shown that:
"Initiated firms experience a five-day abnormal return of 4.1% for firms with coverage. The abnormal returns are concentrated in the days just before the quiet period expires."
This increase in price will generally emerge several days ahead of the actual quiet period expiration, as investors realize that positive research reports are forthcoming from the many underwriters and attempt to take advantage by purchasing shares beforehand. This early buy-up places upward pressure on the stock price before the date of the expiration.
Since its 2010 inception, Zulily has grown into a major player in American e-commerce through its unique effort to target a traditionally potent category of consumers-moms-through internet flash sales. An average day sees the website put forth approximately 4500 product styles via the time-limited events.
Zulily maintains an extremely limited inventory, and functions as a middleman between its well-crafted target market and vendors, a service which is especially valuable to smaller firms without the resources to specifically target the mom-market themselves. Zulily's popularity has swelled in the past year, nearly doubling its customer base of active users between September 30, 2012 and September 29, 2013.
Darrell Cavens co-founded the mom-centric site, and has served as its President and CEO since 2009. Mr. Cavens owns 25,000,000 shares with a current value of $875,000,000. This stake provides him with a lot of incentive to continue to grow this exciting company.
Zulily's great IPO was no surprise, although the first day response may have been a little overenthusiastic; we believe the firm is near its true value at its current prices. A price increase resulting from the quiet period expiration could be exciting and the truly ambitious investor might consider this a buying opportunity.
We believe this is a firm well worth owning; it is rapidly making its way to profitability, having posted a small profit of $0.2 million for the nine months ending September 29, 2013, and it has certainly seized still-growing attention in the online marketplace. The quiet period expiration is as good a time as any to buy into ZU.