eMailbag Monday: Lock-Ups, Insider Selling, JDS Uniphase, NDB
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I read your comments on IPO's on 8/16/99. You mentioned that insiders flip stocks within a few days of the IPO. I thought insiders were required to hold these IPO stocks a minimum amount of time, say 60 days or so. Is this true? If so... what are the rules for when and how much insiders can buy or sell?
-- Larry Dunlap
Reply: According to the Securities and Exchange Commission (SEC) rules, an "insider" is an officer, director, key employee or major shareholder (owns at least 10% of any class of stock). In most IPOs, the underwriter will require that the "insiders," as well as just about every other employee of the company, sign an agreement not to sell stock -- known as a "lock-up." The term is usually six months. Although, sometimes it may be less. For example, eBay's was only four months.
Rather, the flippers of IPO stock are not employees of the company, but outside investors -- such as wealthy individuals and institutions. These investors are not covered by the "lock-up," and can sell any time.
On the Inside
Being an avid reader of the Internet Stock Report, I had a few questions for you concerning your answers in Monday's eMailbag.
1) When would you say that the amount of insider selling is good or bad?
2) About your reply to "The IPO Decay Curve": As an individual day trader does this mean I should place my order with my internet broker the night before or before the market opens, in order to make sure my order is higher up the queue when the stock reaches the market. Would this give me a better price?
-- Max Ryerson
Reply: As to the first question, as a general rule, insider buying is more significant than insider selling. The reason is that when an insider buys stock, there is usually one reason: the person believes the stock is undervalued and will go up. Of course, insiders are not infallible and may misjudge the future like anyone else.
In regard to insider selling, there may be a myriad of reasons for this. For example, the insider may want to diversify holdings; may want to buy a house; may need to pay off a divorce, and so on. After all, Bill Gates has never bought a share of Microsoft (MSFT ) since his company went public; he has only been a seller.
But there are signs to be wary of when looking at insider sales. They include:
1. Cluster Selling: This is when many of the top executives sell their shares within the same time period - say within a few months.
2. Proportionality: Look at the holdings of each executive. What percentage of their holdings are they selling? If you see that they are selling 20 or 30 percent or more, this can be troubling.
Now, for question #2. I would never put a market order in on the night before. This would be the equivalent of writing a blank check, since there is no way of predicting the price. Often, the first trade is much higher than the offering price. Putting the order in at the night before, as a result, does not give you any advantages.
With the surge in Net access, there is tremendous demand for high-capacity fiber optic telecom networks. These networks need components and modules to make things work right - and this is what both Uniphase and JDS do. Uniphase is the leader in the "active market" (these technologies combine optical and electronic components) and JDS is the leader in the "passive" market (which deals only with the optical part of the network). Combining the two companies means that there should be more integration with the technologies, and hopefully, better performance. Also, as the optical telecom networks become more complex, vendors would rather purchase their components and modules from one vendor.
So, yes, this was a very smart merger.
Buying a Broker
I'm very interested in what you think of National Discount Brokers (NDB )? If you have any interesting tidbits for the newsletter, I'd like to hear them. Thanks! They're at an insanely low P/E for an on-line outfit and way below their 52-week high.
-- Mark W. Sink
But, all other online brokers are also selling at greatly reduced valuations, such as E*TRADE (EGRP ), which hit a high of 72-1/4 and is now selling at 26-9/16 and Schwab (SCH ), which peaked at 77-1/2 and is currently selling for 42-11/16.
So, I would actually look at these two instead of NDB. Online consumers want as many choices as possible - mutual funds, IPOs, after-hours trading, banking, mortgages, bonds, insurance - all wrapped into personalization technologies.
In fact, the vision of a "financial marketplace" has been a goal of the financial industry for many years. With the Net, it looks like this will be possible, but likely provided by the leading online firms that have the resources - such as E*TRADE and Schwab.
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