As Chicago Fed President Charles Evans expressed yesterday on CNBC, confidence matters to investors.
Investors view insider buying and selling as an important indicator of internal confidence in the direction of a company and scrutinize SEC filings for any indication of strength or weakness (evidenced by SA's own section devoted to insider actions).
This has been no more evident than in recent IPO lock-up expirations. Investor anticipation of expiring lockups has led to outsized declines in post-IPO stock prices. The pre-lockup selling has more to do with supply/demand dynamics than confidence.
Yelp's (NYSE:YELP) lockup expiration day (August 29th) spike of 22.5%, however, was all about investor confidence. Yelp opened down more than 3% and quickly rebounded when the lockup sellers never materialized. The idea that this one-day spike was attributable to a short squeeze seems unlikely given Yelp's continued upward momentum.
These may seem like obvious insights to seasoned investors and many made a nice profit by following Yelp's employees lead. The lesson, however, is an important one for Facebook's employees.
Facebook's (NASDAQ:FB) impending employee lock-up expiration (243m shares on October 29th) offers Facebook employees the opportunity to demonstrate their confidence (and, coincidentally, increase the value of their shares, options, and/or RSUs).
Facebook investors have already demonstrated their confidence sensitivity: negatively on Peter Thiel's massive sale and positively on Mark Zuckerberg's commitment to hold. Facebook employees' decisions on October 29th present the most important confidence signal remaining for investors; more important, even, than the massive 1.3 billion (or ~600m, excluding Zuck's shares) shares that will hit the market on November 14th (which are mostly held by VCs who frequently have a duty to distribute the shares to their LPs upon the expiration -- none of whom qualifies as true insiders).
The likelihood of a Yelp-like spike for Facebook's shares on October 29th seems remote given Facebook's recent run-up, however, a positive signal from Facebook employees could continue the positive momentum through an important period in Facebook's young life as a public company.
Disclosure: I am long FB, I am short YELP (value call). I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.