Why Did Facebook’s Underwriters Dump its Stock so Fast?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook’s (NASDAQ: FB) share price has been all over the map.  From a high of $45.00 and a low of $17.55 to its current $23.56 price, Facebook’s road has been rocky.

The mutual funds of Facebook’s IPO underwriters know this well – and have bucked their traditional equity holding periods to “trade” Facebook shares.  Here is a snapshot of the funds’ investing styles, and the resulting list of questions that Facebook investors should be asking.

Buy for the Long Term

Underwriters and brokerages hope to maintain stable markets around new IPOs.  As a result, investors often have restrictions around IPO trading.  At Fidelity Investments, for example, if investors sell IPO shares within 15 days of purchase, they are banned from buying IPO shares for six months.  The reason is because fast selling (trading) can hurt the newly-minted stock’s upward price growth. 

Mutual funds, however, don’t have the same restrictions.  And they have played this to their advantage.  Mutual funds at JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), and Morgan Stanley (NYSE: MS) all dumped Facebook shares in a hurry.

Changing Hands Fast

JPMorgan’s Large Cap Growth Fund manages $8.7 billion and has an eye for the tech sector.  The fund owns shares in high-growth firms and has shares of Amazon, which some debate trades at an inflated valuation.

JPMorgan’s fund purchased 561,400 shares of Facebook at the May 17 IPO – but it sold all of them by the end of May.  The interesting part: The fund’s typical holding period runs about three years, far less than the short tenure that it held Facebook.  The Wall Street Journal put it well:

In all, 14 J.P. Morgan funds bought almost 1.1 million shares of Facebook at the IPO.  By the end of May, the 13 funds for which data are available had sold about 620,000 shares.

Wells Fargo’s’ experience is similar.  Wells’ Advantage Growth fund typically holds stocks for two years.  At the IPO, the fund bought 146,000 shares but closed the entire position by May’s end.  Of the 577,000 shares that Wells’ 11 funds purchased, eight of the funds had sold 237,000 by May 31.

An analysis of Morgan Stanley tells a similar story.  Morgan Stanley’s Focus Growth fund targets approximately 40% of its holdings toward the tech sector.  The fund manages $1.5 billion and purchased 2.8 million shares at the May 17 IPO; it trimmed 1.2 million shares before April.  In all, Morgan Stanley’s 17 funds scooped up 6.8 million IPO shares – and 15 of those funds had sold 2.6 million shares by the end of May.

The quick sale of Facebook shares is different for how the Focus Growth fund handled its investment in Zynga (NASDAQ: ZNGA), for which Morgan Stanley was also an underwriter.  In Zynga’s IPO in December 2011, the fund bought 875,857 shares at the $11 IPO price.  Before December ended, the fund picked up additional shares to end the year at 1.4 million, despite Zynga’s stock dropping below $10.  Now Zynga trades at $2.21.  Why is Facebook different?

Analyzing Facebook

JPMorgan, Wells Fargo, and Morgan Stanley were all underwriters for Facebook.  The banks’ investment management divisions sold shares quickly after buying them.  Could this be a coincidence?

CFA Institute, the group that awards the Chartered Financial Analyst designation, posts ethical guidance on keeping firm walls in place to separate investment banking and other bank divisions.  The underwriting banks certainly could have followed these guidelines.  Regardless, the fast stock sales have me asking a few questions about Facebook – questions that Facebook shareholders should be asking themselves.

Why did major mutual funds with 2-3 year typical holding periods “flip” the stock in a matter of weeks?

Did the funds foresee the problems that would weaken Facebook’s display ad revenue, like increased users that would view the platform from mobile phones?

Did the funds believe that most of Facebook’s rapid, expansionary growth was behind it?

Is Facebook still a company capable of delivering consistent growth, both in profits and in users? 

If so, at what price am I willing to pay for shares?

Facebook is a good company.  It is also a good investment – at a low entry price.  If you believe that the economy could turn south, then perhaps Facebook is not the place to invest, since advertisers could spend fewer dollars in bad economic times.

If you think that the economy is just heating up, however, then perhaps it could be time to scoop up some Facebook shares while they are still depressed.

ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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