(By Kevin Donovan) An old accounting professor of ours posed this question years ago to his class of Ivan Boesky wannabes: Would you buy the stock of a company that you knew would never pay a dividend? After all, when all is said and done, shares of publicly traded companies are nothing more than claims on future cash flows. Enter the greater fool theory of trading.
That theory acknowledges one's less-than-perfect grasp of a company's true worth but posits that there's always someone with an even dimmer crystal ball who will buy high and sell low.
Beginning tomorrow, Facebook (FB) insiders owning some 271 million shares will be free to unload their stakes in the social media company that went public May 17 in an initial public offering that raised $16 billion. Since then, the shares are down 47% from the IPO price. The lockup expiration is the first of a series that will eventually free up a total of 1.9 billion shares. That overhang could dampen whatever investor enthusiasm remains.
Meanwhile, Facebook director Peter Thiel, an early investor who sold more than 16 million shares in the IPO converted more than 9 million shares to Class A from Class B, according to a document filed Aug. 10 with the U.S. Securities and Exchange Commission. Class A shares are easier to trade. Thiel netted $630 million from the IPO and still holds a stake worth more than $550 million, according to reports.
Before rushing to the exits, though, consider that some smart cookies have accumulated positions in Facebook. In regulatory filings released Tuesday, hedge fund heavyweights George Soros and Steve Cohen let it be known they have bought stakes. Bloomberg reported that the $25 billion Soros Fund Management LLC had 341,000 Facebook shares worth $10.6 million at the end of June. Cohen's SAC Capital Advisors owned 151,450 shares valued at $4.71 million.
Of course, we don't know what they've done since, and the filings don't require listing short positions hedge fund managers may have. According to Finviz.com, more than 9% of Facebook's float has been shorted. That could provide fuel for a short-covering rally should the stock find a bottom. But the shares fell 5.65% yesterday as investors sold ahead of the first lockup expiration, and in trading before the bell this morning the stock was down another 1.23% at $20.13. No bottom yet but within shouting distance of the $19.82 low.
Risk-averse investors shouldn't play, but a pop is possible if insider selling isn't significant. We wouldn't take out a second mortgage, but we think buying Facebook at these levels is at least worth wagering a tank of gas. Obviously, the choice comes down to who is the greater fool.