Recent IPOs Sink On Lockup Expirations

Oct. 24, 2017 3:28 AM ETAYX, NCSM, OKTA, SOS, YEXT8 Comments1 Like
Don Dion profile picture
Don Dion
12.68K Followers

Summary

  • 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:

  1. 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.
  2. Tech companies that do not have secondaries during the lockup period.
  3. 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.

Our Results

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. (OKTA), Yext, Inc. (YEXT), NCS Multistage Holdings (NCSM) and China Rapid Finance (XRF).

Our three recent picks: AYX, OKTA, YEXT

On September 11th, we recommended that investors short shares of Alteryx (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).

What's Next?

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:

  1. NCS Multistage Holdings Could Head Lower On Lockup Expiration - Event Date is October 25th.
  2. China Rapid Finance Could Stumble With Lockup Expiration - Event Date is October 25th.

This article was written by

Don Dion profile picture
12.68K Followers
Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com
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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.

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