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So What Happened On Facebook (FB) Yesterday?

November 15, 2012 | About:
It’s always amusing to me. Yesterday, as many of you know, was a big lockup day for Facebook shares. What does that even mean? A company like Facebook offers early investors and employees a lot of shares. It’s a way to compensate them without shelling out tons of cash and also gives them a big reason to stick around. It doesn’t always work but in most cases it ends up working. Why? Because those employees cannot just sell the shares. They own restricted shares that can only be sold on a given day. Every few months, employees have new shares that can be sold. In the case of a huge recently turned public company, those dates are significant. Take today. Facebook had a bit over 1 billion shares being traded as of yesterday. This morning, almost 800 million shares owned by these employees and others were made available for sale.

So The Stock Is Going To Tank Right?

Conventional thinking makes us believe that the stock is going to tank. If this morning, 800 million shares are for sale, that will make the stock tank right? After all, that is what happened on the much smaller date a few months ago. And so the headlines were all over the place, on tv, newspapers, blogs, etc. As an investor, I always find such events interesting. As a Facebook shareholder, I was obviously curious to see how the day would go.

Nothing Is As Simple As It Seems

No one could ever predict that a stock will tank weeks in advance just because a lockup period is coming. That is insane. Just think about it for a second. If that were the case, wouldn’t investors sell their shares the previous day to buy it back once the decline had happened? It would be a no-brainer. It’s not that simple.

-Everyone knew this would happen: investors that wanted to trade on it did so weeks ago, not just today. For example, some investors that wanted to buy the stock waited for the lockup period hoping for a cheaper entry point. If enough investors do this, it can dwarf the for sale stock

-Valuations remain the same. This is critical. I bought Facebook at a $45B market cap or so because I believed it was cheap. The fact that 800M shares are made available does not change the value per share, the P/E earnings, etc. All of those account for ALL shares, not just the ones available for sale

-Don’t assume that everyone that CAN sell shares is doing so. Many leaders including Mark Zuckerberg and Sheryl Sandberg are selling tiny parts of what they own and keeping the vast majority. I would expect many others to be doing the same.

Facebook ended up having a spectacular day… rising more than 10%…

FB.png

Obviously, I’m not saying this will happen on the next lock-up date.. I’m just saying that it’s never obvious weeks in advance that a stock will increase or decline..if it were, investors would already be trading on that event/news.

One More Reason To Avoid Intra-Day Stop Loss Orders…

Monster Worldwide (MWW) crashes after it confirms it has not found bidders for the company:

MWW.png

Pandora (P), which I have been very bearish on continues to struggle with competition from Spotify and others and a soon-to-arrive Apple radio

P.png

Speaking of Apple (AAPL), still not understanding why it keeps sliding.. has it lost SOME mojo and come up with an underwhelming iPad mini? Perhaps.. but it’s trading at a P/E of 12!

AAPL.png

Blue Nile (NILE), the stock I’ve been most bearish about for years now had a terrible day, still looks vastly overpriced..60 P/E for a company that grows<5% year… need I say more????

NILE.png

Disclaimer: Long Facebook (FB), Long Apple (AAPL), Short Monster Worldwide (MWW), short Blue Nile (NILE)


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