Trading in the zone: A new Web site helps investors take advantage of a trading anomaly in the initial public offering market.
Because only 15% to 20% of a company's shares typically are sold at the IPO, an inside shareholder deciding to sell a big block of shares could depress the stock price. That's why insiders and underwriters are restrained by contract from selling their shares for a period of time, usually six months, from the IPO pricing date.
When the lockup agreement expires, however, the stock price frequently dips - by as much as 10% to 20% over a two- or three-day period - as insiders cash in a portion of their newfound wealth and venture capitalists seek to sell off holdings.
In the vast majority of cases, though, the stock bounces back after the end of the "lockup zone," sometimes to yet higher levels as IPO stocks obtain greater liquidity and become more attractive to institutional investors who need to buy in size.
For example, Inet Technologies Inc., whose May 26 IPO sold 5.75 million shares at $16 each, saw its stock price drop from $57 four days before the expiration of its lockup agreement to $51.94 on the day of expiration - only to bounce back to $55.13 the following day, and to $59.13 the day after that.
In his job of overseeing private equity investments for the $2 billion Duke Endowment Fund, Charlotte, N.C., Brad Alford started noticing these swings. In his spare time, he has developed a Web site tracking stock prices from four days before through four days after expirations of IPO lockup agreements.
The free site - www.ipolockup.com - is "my weekend hobby," Mr. Alford said. While there's no guarantee that all IPOs follow this course, the trend clearly is "statistically significant," he said.