By David Sterman
Insiders and directors of LinkedIn (Nasdaq: LNKD) have to be pleased with how their stock has performed since going public in May. A solid 64% gain in the past six months (while the Nasdaq has shed 7%) makes it one of the best performing initial public offerings (IPOs) of 2011.
But when the board of directors was recently giving a final check-off on third-quarter results, they spotted a potential problem looming on the calendar. In mid-November, the insiders who were "locked-up" and prevented from selling all of their pre-IPO stock got the green light as the 180-day restriction period expired.
The Board had ample reason to worry. One of the reasons the stock has performed so well is the scarcity factor: Only 7.84 million shares were sold to the public in May, well below the actual demand for shares. It's axiomatic to note that a stock price is simply a function of supply and demand -- everything else is noise. With the lock-up expiration looming, a new supply of stock (8.7 million shares) looked set to meet or exceed demand.
In response, LinkedIn took the absurd step of kicking the ball down the road. As part of a just-announced secondary share offering, the restriction on insiders has been put in place for another 90 days. But this just forestalls the inevitable.
Indeed, another dozen companies are facing the "lock-up expiration" headwind between now and the end of the year. Buying these stocks in advance of newly-released stock could be quite risky, and if you own them, then be prepared for possibly bumpy trading ahead.
Many more shares of Russian search engine provider Yandex (Nasdaq: YNDX), for example, will be released this coming Monday, Nov. 21. In anticipation, shares may already be coming under pressure. Daily trading volume has surged this week and shares may be weakening as a result of concerns about next week's lock-up expiration.
The key is to focus on how the stock has traded since the IPO and how many shares might still come on the market. For lagging 2011 IPOs such as Lone Pine Resources (NYSE: LPR), Vanguard Health Systems (NYSE: VHS) and Solazyme (SZYM), insiders might simply look to hold tight and unload shares down the road at (hopefully) higher prices.
For the best-performing IPOs of 2011, the temptation to sell at higher-than-IPO prices must be tremendously tempting. Insiders at Austin, Texas-based HomeAway Inc. (Nasdaq: AWAY) saw their stakes in the company soar in late June when the stock debuted at $27 a share and finished the first day of trading above $40. Shares have since cooled to $32, but remain at such seemingly expensive levels that insiders may be tempted to sell a lot of stock as soon as they are legally allowed.
HomeAway has rolled up on the online vacation-rental space through a spate of acquisitions. An ongoing string of deals helped the company to boost second-quarter sales (its first quarter as a public company) 41% to $59 million. This growth rate slowed to 37% in the third quarter to $61 million, and in the absence of fewer recent deals, sales growth is expected to steadily come down about 10% in the quarters ahead.
That's not to say the business model is petering out, but only that the strongest growth has likely passed, and analysts will probably start thinking of HomeAway as a moderate organic growth story. Meanwhile, the stock trades for more than nine times projected 2012 sales and a hefty 57 times projected 2012 earnings per share (EPS). And, like LinkedIn, the scarcity factor may account for this stock's appeal thus far -- just 10% of all shares currently trade in the float. So as a lot more stock hits the market, the selling pressure is likely to be a lot stronger than the buying pressure.
Fusion-io (NYSE: FIO)
Nearly three weeks ago, I suggested this maker of computer storage-device stock was ripe for a pullback.
Instead, a solid quarterly report led to short covering that has pushed the stock up from the $30 range to about $40. My timing was off, as the short thesis was predicated on events that would likely take place this winter: "Rivals such as EMC (NYSE: EMC) and NetApp (Nasdaq: NTAP) are preparing their own rollouts of flash-storage devices, and they have much deeper and long-standing customer relationships," I wrote in late October.
Was that forecast flat wrong? Not according to some analysts. "Fusion-io has a lead now ... but as competitors come into the market, Fusion-io's lead will diminish," noted Merriman Capital's Kaushik Roy in a Nov. 4 note to clients. He has a "sell" rating on the stock and a price target between $15-18, well below the current $40 price. More competition inevitably yields price wars, and Roy adds that "Fusion-io has already dropped prices for its next-generation products, but the competitors are starting to sell at less than half of Fusion-io prices."
As a key concern for short-sellers, some analysts predict Fusion-io may deliver another strong quarter or two this winter. But they also predict problems heading into 2012.
The recent rally in the stock may be partially due to a low amount of shares being traded: only 12% of the company's total share count can be freely traded. "Shares have performed well since our initiation, in our view partially benefiting from a thin float that was heavily shorted, neither anticipating the strength of a solid quarter nor the volatile reaction of the stock given the lack of liquidity," note analysts at Sterne Agee.
Will this all change on Dec. 5, when the other 88% of the company's stock will become unrestricted? Time will tell. Analysts at Sterne Agee suspect results in the current quarter may help shares stay aloft, but they still see them falling down to $22 over the course of 2012.
Risks to Consider: Insiders and directors have the right to sell shares when these lock-up periods expire, but because they may hold off doing so for a little longer, these lock-up dates shouldn't be used as a hard target.
Investors should keep a close watch on these names before taking any action. A steadily-expanding supply of shares during the course of 2012 as insider-held stock dribbles out will surely an effect on these stocks. If you own any of these stocks, they may be worth selling right now in anticipation of this "lock-up" expiration -- or worth shorting on the way down. If shares fall as a result, then these IPOs may actually be worth a second look at (presumably) lower prices.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.