By David K. Randall
NEW YORK, May 16 (Reuters) – Try as they might, many retail
investors won’t be able to get shares of Facebook in its first
hours of trading.
They may be better off waiting it out anyway. Buying at the
closing price of the initial public offering day and holding on
to your shares has not been a profitable strategy lately,
especially for companies in the media business.
While Facebook is a unique company with 900 million users,
some recent IPOs serve as reminders that the sizzle for once hot
companies can fade quickly. Of seven media or social media
company IPOs in the last year, only LinkedIn is now
trading above where its stock closed after its trading debut.
Millennial Media, a mobile advertising company, saw
its shares jump 92 percent the day its shares debuted in late
March. Since then, the stock has slid nearly 46 percent to
$13.40, as of Tuesday’s close.
Last year, shares of Demand Media jumped 33 percent
on the company’s initial day of trading. Over the next six
months, they fell 49 percent, and are down about 63 percent
overall as of Tuesday. And investors who bought shares of
Groupon after they closed 31 percent higher on the
first day in November have lost 53 percent as of Tuesday’s close
as the company’s shares slid to $12.17 each.
Optimistic potential investors in Facebook,
co-founded by Mark Zuckerberg in 2004, may consider the company
immune to a post-IPO letdown because of its popularity. But
there are ways investors can time their purchases to prevent
getting caught up in the early euphoria.
Facebook, which is expected to have its initial public
offering on Friday, is planning to raise as much as $16 billion
by selling about 421 million shares at a target price range of
$34 to $38 each. While the company has set aside some shares for
retail investors, brokers tend to reserve this allotment for
wealthier clients.
Those who don’t qualify will be stuck trying to get in on
the buying frenzy of the first day, at a time when some analysts
expect shares of Facebook to pop more than 30 percent to more
than $50 each.
Waiting a week or two from the first day of trading may
prove to be more profitable than trying to get in on the first
day, analysts said.
“You want some of the frothiness from the excitement of the
IPO to burn off,” said Jim Krapfel, an analyst at Morningstar
who covers the company and values the company at $32 per share.
Buying at the first day’s closing price would leave “limited
upside for long-term fundamental investors,” he said in a recent
report on the company.
Dave Abate, a financial planner with Strategic Wealth
Partners in Seven Hills, Ohio, said that he is telling clients
to wait a couple of days for the stock to reach an equilibrium.
Facebook is the first time his firm has developed a client
strategy specifically for an IPO, he said.
“Everyone and their grandma uses Facebook and wants a piece
of it. They feel like they’ve missed the boat with Apple
and this is their opportunity to get in on the ground
floor,” he said.
Zuckerberg, who turned 28 this week, is one of the world’s
youngest billionaires, but despite the allure of Facebook,
investing in the company comes with risks, such as the company’s
reputation with being unconcerned about user’s privacy, Abate
said.
“I consider Zuckerberg a pretty big risk himself. He’s
unpredictable and if he grows bored with the company (and
leaves) I don’t know what’s left of Facebook at that point,” he
said.
Abate is also concerned that Zuckerberg has too much power,
with more than 50 percent of voting rights, increasing the risk
in investing in the company. For clients that remain interested
in Facebook, Abate is counseling them that there will be several
dips in the future to buy the stock without buying at an over
inflated value because of “short-term flippers.”
One way to avoid short-term remorse: buying shares of mutual
funds that already own shares of Facebook. T. Rowe Price, for
instance, purchased shares of Facebook traded on private markets
and has spread them across 19 funds.
Krapfel said a date potential investors should watch for is
91 days after the IPO, or Aug. 20. That’s the day that the first
so-called lock-up period for 172 million shares expires,
allowing some insiders to sell their shares.
The end of a lock-up period typically leads to a decline in
share prices, according to a 2001 paper in the Journal of
Finance by Laura Casares Field and Gordon Hanka. The pair found
that a company’s average trading volume tends to increase by 40
percent and shares fall an average of 1.5 percent over three
days after its lock-up ends.
August will be a relatively small insider selling window.
Most employees and directors, except for Zuckerberg, will have
to wait to sell their insider shares after 151 days, Krapfel
said. The majority of the insider shares – 1.34 billion in all,
which includes Zuckerberg’s stake – can be sold 181 days after
the IPO.
Some analysts said that heavy selling by insiders may be a
warning sign for investors.
“At this stage, if anyone sold a considerable stake at the
lockup stage it would be a giant yellow flag, especially given
the young age of executives,” said John Kozey, an equities
analyst at Reuters.
The last four months of 2012 will bring two more milestones.
Nasdaq OMX Group, the company behind the exchange,
changed its rules in April to allow companies to be included in
its Nasdaq 100, a cap-weighted index of the largest
non-financial shares in the Nasdaq Composite Index, four months
after they begin trading. Once that happens, analysts expect
that index funds and ETFs that track like the Nasdaq 100, such
as the $31.3 billion PowerShares QQQ ETF, will add
shares of Facebook, potentially lifting the stock by a few
percentage points.
And in November, Facebook will be eligible for inclusion in
the Standard & Poor’s 500 Index, the benchmark for most mutual
funds. S&P; typically requires IPOs to trade for six to 12 months
before considering the companies for its indices.
The announcement of a new company to the S&P; 500 index
typically results in a 5.7 percent one-day pop in the company’s
shares, according to a paper in Financial Management in 2006.
