Over 52 million shares were unlocked in Yelp (YELP) today, an event many short sellers believed would cause shares to fall.
Instead, the price jumped more than 20% as insiders held on, leaving short sellers with the uncomfortable decision of covering into a short squeeze or holding out in hopes insiders have a change of heart.
For some, covering still made sense. Those savvy enough to short shares at the peak near $29 in early August were able to walk away with a sizeable return.
However, those who piled on this week are left wondering: "what happened?"
Anyone who has observed the markets for any period of time knows risk rises when everyone stands on one side of the boat. This time appears no different.
There's an old adage on Wall Street, "buy the rumor, sell the news." In this case, the excitement -- and short side profit -- were found in the anticipation rather than the result.
Facebook (FB) holders are likely looking at Yelp and wondering, "could this happen for me, too?"
Yelp has been on a roller coaster since its launch, trading as high as $32 and as low as $14.
Along the way, short sellers built up a short position of over 3 million shares, equal to four days to cover. Given only 16 million shares float, it's not hard to imagine why shares jumped so dramatically today.
A lot was made of August's 268 million lock up expiration for shares of Facebook. But the real story is the 1.7 billion shares set to unlock between now and May 2013. The next expiration, some 249 million shares, is slated for mid October.
Unlike Yelp, Facebook's investors aren't as committed.
As Facebook shares have slid from $38 to $19, days to cover have climbed to 2.4, or roughly 90 million shares.
While this is a huge number in absolute terms, those hoping for a Yelp-like squeeze may be disheartened to know some 519 million shares are floating.
In percentage terms, short sellers hold a similar percentage of the float short. But the reality is there is a much different supply-demand relationship between a company with a half million share float and one with a sub 20 million float.
Additionally, even at Yelp's $17.61 low in August, investors who bought into the IPO at $15 were still in the money. So, there wasn't a great incentive to panic out of shares and unwind the long into today's rally.
Facebook's story is much different.
It's trading at roughly half of its IPO price. With a fair share of investors stuck in a "hope and pray" mindset, you can bet folks will be meeting every rally with shares to sell.
And while Yelp's early investors have continued to show they're happy to stick it out, Facebook's have been more than happy to head for the exit.
Finally, while Yelp can put the lockup overhang behind it, Facebook will continue to suffer through a handful of lockups and uncertainty until well into 2013.
Given the overhang, it's best to remember hope is a horrible investment strategy. Instead, those long Facebook should focus more on the potential exploitation of its user base than a Yelp-like rally.