eMailbag Monday: Lock-Ups, Insider Selling, JDS Uniphase, NDB

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

— Larry Dunlap

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.

Interestingly enough, the family of the insiders are usually covered by the
lock-up period. Last week, for example, the husband of Dr. Nancy Snyderman,
a director of (KOOP
), sold $53,000 of shares in the company before the lock-up expired
(the husband was not an employee of company). However, the money was
returned when they realized it violated the lock-up.

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

— 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

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.

Happy Marriage

I love your daily read on the market and happenings. What is your take on
the new merger that created JDS Uniphase (JDSU

— Ken

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

No doubt, NDB (NDB
) is at a low valuation to its peers. Not long ago, the stock was
trading at $93; now it is at $32-3/4.

But, all other online brokers are also selling at greatly reduced
valuations, such as
), 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

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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