August 16th was a brutal day for Facebook (NASDAQ:FB) and the company's investors. As the lockup expired today, millions of Facebook investors who weren't allowed to sell their shares raced each other to dump their shares and rid their portfolios of Facebook. In total, 157 million shares changed hands, as the stock price fell by nearly 7% for the day, now off 48% since the long-awaited IPO. The volume of Facebook trading was 5 times as high as an average day, on which 30 million Facebook shares change hands.
About 271 million shares of the company got unlocked today, and it is nearly impossible to know how many of the 157 million shares sold today were part of the unlocked shares. Some individuals who were shorts on Facebook had feared that most of the insiders would end up holding onto their Facebook stocks, forcing some of them to cover their short positions. Of course, what the shorts have feared did not happen, and Facebook continued its plunge.
Today so many people dumped their Facebook shares that there were almost not enough buyers to catch the "falling knives" in the air. There were potentially 271 million shares to dump, and there are still many insiders that didn't dump their shares yet. There are possibly 100 million more shares to be dumped tomorrow and in the following days.
I don't remember the last time a company's shares were dumped at such a rapid rate by insiders. There are 2.14 billion outstanding Facebook shares (only 421 million were being traded in the market until today's dump) and today's dump involves nearly 15% of these shares (of course, the same share might have changed hands more than once during the day). This is one of the scariest things for the company's remaining investors, because this shows that the insiders of the company have very little faith in the prospects of the company.
Usually it is said that when an insider sells his stocks, it doesn't mean much, because an insider might sell his stock for any reason or no reason at all; however, when an insider buys new stock in his company, that signifies something. In today's incident, insider selling means something too, because it was done by many people at once. I understand if a few insiders sell their stock; however, what happens when tens of insiders dump their stock all at once? Then there is trouble. Why invest in a company even insiders don't believe in?
In about 3 business days, the identities and breakdown of the insiders who sold their shares will be available. This will give investors a better idea about whether they should initiate a long or short position with the company. If it turns out that a lot of the higher level people in the company got engaged in stock dumping, this can tell us that it's a good idea to stay away from Facebook. If it was only a couple people within the company, this might tell investors not to worry too much.
In the short term, Facebook might have a dead-cat bounce like it did the last time it fell below $20 per share. In the long term, it is very difficult to tell where the company's share price is headed. Since going public, Facebook had 36 down days and 25 up days. Of course, the down days were much more volatile than the up days. The trend might or might not change in the following days, depending on the mood of investors. At this point, Facebook's fundamentals aren't likely to move the stock price in either direction; the mood of investors will be the main player in determining the direction of the stock price until the next earnings report of the company.
My advice on Facebook is the same as always. I advise people to stay away. I wouldn't long it, I wouldn't short it. At this point, touching Facebook from either side involves a lot of speculation and gambling. This is one stock for which no one really knows the true value or true potential. In the short term, it could go anywhere.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.