Since 2011, we have studied the strategy of shorting IPOs prior to their lockup expirations.
Our last three recommended lockup plays for Alteryx, Okta and Yext have had strong results.
We continue to believe that the lockup strategy will perform strongly in the future for IPOs that meet certain criteria.
Overview: A profitable IPO trading strategy
One of our most profitable IPO trading strategies - the one that we have been highlighting on our premium service in recent months - is shorting recent IPOs that meet certain criteria in the two weeks prior to their IPO lockup expirations.
Why? Readers who regularly follow these recommendations are likely familiar with the strategy, but here's a quick recap. When companies go public, company insiders and pre-IPO shareholders are subject to certain restrictions concerning shares that they own. These insiders and pre-IPO shareholders own stock that is subject to a 180-day "lockup period." When the IPO lockup period expired on the 180th day, these shareholders - who generally own sizable stakes in the company - are finally allowed to unload their shares, take their profits, invest in other ventures, etc.
The opportunity? When all of these previously restricted shares are finally freely tradable, these pre-IPO insiders and shareholders are often eager to unload their positions - and they often do it at the earliest possibility on the 180th day. Because these holdings are often sizable, the marketplace can end up being flooded with these newly tradable shares, and the stock price can take a sharp, sudden, downward turn as a result.
When the strategy works best
Over the six years that we have been implementing the IPO lockup investment strategy, we have found that the lockup shorts that have worked best generally have a few things in common:
- There are a large number of pre-IPO shareholders, venture capital firms and insiders who hold sizable positions. Many of these investors and funds have had their money tied up in these IPO periods for some time and are eager to invest in the latest deal or reallocate funds to another investment or project.
- Tech companies that do not have secondaries during the lockup period.
- IPOs that have performed well during the lockup period. Often, restricted shareholders are even more eager to take money off the table and sell their shares when they've been raking in huge profits during the IPO process.
Since the inception of our IPO lockup trading strategy in 2011, we have shorted 273 recent IPOs ahead of their lockup expirations. This trading strategy has been profitable more than 62% of the time, and our profitability has improved over time as we have learned more about what factors tend to make our trading strategy the most successful.
In 2017, we are seeing some of our best results yet. Since January 1st, we have shorted 29 recent IPOs in the two weeks prior to their lockup expirations and have had a success rate of 65.52%. Particularly impressive have been our four most recent recommendations: Okta, Inc. (NASDAQ:OKTA), Yext, Inc. (NYSE:YEXT), NCS Multistage Holdings (NASDAQ:NCSM) and China Rapid Finance (NYSE:XRF).
Our three recent picks: AYX, OKTA, YEXT
On September 11th, we recommended that investors short shares of Alteryx (NYSE:AYX) ahead of the company's IPO lockup expiration on September 20th. We recommended that interested investors cover these short positions after the AYX lockup expiration.
Investors who followed this strategy netted approximately 4% (using average prices).
On September 21st, we recommended that readers short shares of recent IPO Okta ahead of the company's IPO lockup expiration on October 4th. We suggested that investors who established short positions should cover those positions in OKTA following the company's lockup expiration on October 5th.
Investors who followed this strategy would have netted a 5% gain (using average prices).
On September 28th, we recommended that readers short shares of recent IPO Yext ahead of the company's IPO lockup expiration on October 10th. We recommended that interested investors cover their short positions in YEXT after the lockup expiration.
Investors who followed this strategy netted nearly 8% (using average prices).
Readers should consider shorting the two latest IPO lockup expiration events that we have suggested: NCS Multistage Holdings and China Rapid Finance. Regular readers looking to get actionable lockup trade ideas first should also try out a free trial of Don Dion's IPO insights by clicking here. All of our best IPO lockup investment ideas are published on our premium service first.
Read our recommendations for these events at the links below... it's not too late to get short XRF and NCSM:
- NCS Multistage Holdings Could Head Lower On Lockup Expiration - Event Date is October 25th.
- China Rapid Finance Could Stumble With Lockup Expiration - Event Date is October 25th.
Disclosure: I am/we are short XRF, NCSM. 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.