MorningWord 8/21/12: Oh Facebook, we hardly knew ya. You had about a half hour of glory before the “machines” f’d it up for all the instituions who were looking to flip their IPO allocations to unsuspecting retail investors’s “market on open” buy orders and now everyone is pissed at you, even the VC’s who wish they could have sold more on the IPO, but now have to settle for public prices less than half of the opening print in May (Peter Thiel, Paypal founder, early FB investor and board member reportedly sold most of his stake last Thurs and Fri).
I am not going to waste key strokes placing blame on how the most anticipated tech IPO since GOOG, has burned almost everyone who has come near it in it’s short existence, but I will offer a suggestion that just because the smart money has a ton more to sell in the coming months (by most accounts, insiders and certain shareholders have up to 1.4Billion shares that come unlocked in Oct and Nov) doesn’t exactly mean the stock is going the way of ZNGA or GRPN.
In full disclosure, I have NO skin in the game, I am not a user of the service and hopefully never will be, I am not long or short any shares or have options positions in the name. But make no mistake about it, there will be a big trade coming for those not involved and can be a bit patient, at some point soon, when sentiment gets so bad, and you can’t think of a single good reason to step in, then that will be it, but not yet. I am fairly certain that this mornings lows of 18.75 wasn’t THE low, but at some point in the next 3-6 months, the stock will likely set up for a massive move that could be upwards of 50%.
The supply of shares is by all accounts a massive overhang, but at some point the company will figure out a way to manage this a bit better, maybe through some private placements or a secondary offering. But more importantly the company will give investors a reason to want to buy the stock hand over fist again as it did in the weeks/months leading up to its IPO, likely to be something strategic/fundamental. The company has such a short track record dealing with public investors the likelihood of smooth sailing on this front should have been low, but they will get better at it. The price action so far has been classic hate selling, displaying how fickle investors (both pros and retail) can be, Zuck’s hoodie at one time was viewed as the Je ne sais quoi, or the secret sauce of the potential investment, now investors want to hang the young tech titan by its drawstring.
When looking for the model of resurrection it may make sense to look away from this past year’s net IPOs, and look to another once unloved stock/company that had a similarly large (albeit different) overhang, AIG. The U.S. govt which recently sold 190million shares, still owns almost 900million shares, of which they would like to be rid of all if they could. Investors know this, and the stock has had a massive run this year up almost 50%. This is not a stock that is easily pushed around either, like FB it is a market cap of about $50billion. There are few similarities with these 2 companys/stocks aside from sentiment and overhang, and AIG has proven that hated stocks with hundreds of millions of shares can rise, and for those who were patient and kept some powder dry the potential for fabulous short-term gains.
The chart of AIG below shows the double bottom low last year at about $20, since then the stock has barely looked back since the Govt unloaded $190 million shares at the previous high in early May.[caption id="attachment_15791" align="aligncenter" width="490" caption="1 yr AIG chart from Bloomberg"][/caption]
SO I guess my point is, patience for those uninvolved, wait for the double bottom in the months to come, and then pounce, I will likely look to buy the stock and once it starts moving high employ a strategy I detailed earlier in the summer of overlaying the long position with a 1×2 Call Spread to give it some juice.