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Expect More Insider Selling of Facebook Stock

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Tony Avelar | Bloomberg | Getty Images
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Investors in social-media companies appear to be in an anti-social mood, as they bail out of stocks in the sector, especially Facebook.

Many large investors aren't waiting long to sell out as soon as they get the chance, in what some analysts say is an indication that these companies' early backers have little faith in the near-term prospects of the stocks. But those sales can be misleading.

Peter Thiel, an early backer of Facebook and a board member, was the latest and largest investor to sell a large chunk of his company stock. It was disclosed Monday that Thiel dumped more than 14 million shares of the company, equal to nearly 80% of his holdings, according to analyst Richard Peterson of S&P Capital IQ. However, he's been planning the sales for months, according to regulatory filings.

Still, Thiel is not the only big investor in the know to cut bait on social media stocks. Consider:

- More selling by Facebook insiders and early investors. There hasn't been rampant selling yet by insiders at Facebook. Most early investors must adhere to strict lockup rules that prohibit selling until waiting periods have ended. But the ramping up in sales is starting, which won't help a stock that's already some 50% below its IPO price.

Facebook has 2.8 billion shares outstanding, not including 681 million shares that will be released for sale by insiders if they wish at a variety of lockup expiration dates. Excluding shares connected with options exercises, Facebook has 2.1 billion shares outstanding, which values the company at $40.2 billion at its current stock price of $19.16 a share. That's about half what the company was valued on May 18, when its initial public offering occurred.

Thiel is the largest investor who sold in August. Another large seller, according to data from S&P Capital IQ, is The Founders Fund, which reported selling 2.6 million shares of its 6.8 million shares in August. Thiel is a partner of The Founders Fund investment firm. In fact, if you add Thiel's sales with those of all the investment vehicles with which he is associated, more than 20 million of a total of 27.9 million shares were sold, Bloomberg News reports.

Prior to those sales, Goldman Sachs reported in June that it sold 15.1 million of its 51.7 million shares, and Tiger Global reported selling 19.1 million of its 53.9 million shares in connection with the IPO, says S&P Capital IQ. "There hasn't been much insider selling, with the exception of Mr. Thiel," says Richard Uhl, analyst at Thomson Reuters.

- Facebook lockups' lapse looming. The biggest test will come as additional investors are freed to sell. Another 247 million shares will be unlocked Oct. 16 and a massive wave of 1.2 billion shares will be available to be sold Nov. 15. The fact that shares took a hit after the first and one of the smaller lockups doesn't bode well for when more shares become available. "Some of us thought (the first lockup expiration) was factored in (Facebook's stock price), but it wasn't," says Francis Gaskins of IPOdesktop.com, noting that Facebook shares fell roughly 5% last week when 271.1 million shares were unlocked. "What happens when 1.2 billion shares come?"

- Selling at other social-media companies. Facebook has company in terms of seeing some early and large investors sell. Groupon investors Fidelity Investments, Maverick Capital and Citadel sold 32%, 69% and 98%, respectively, of their holdings, according to filings in June, says S&P Capital IQ. Deutsche Asset Management, S.A.C. Capital and AQR Capital sold 75%, 17% and 53%, respectively, of their holdings in social-gaming company Zynga , according to reports in June, says S&P Capital IQ.

Some investors might be worried about the impact of insider sales on newly public companies. But Robert Kennedy, analyst at Gradient Analytics, says investors shouldn't read too much into high-profile sales. For instance, Thiel filed a document on May 18, the day the stock started trading, that he planned to sell the shares he just sold, Kennedy says. Sales by early investors are extremely common at the time of an IPO as these insiders look to raise cash and find the next successful start-up.

"It's so common for insiders to sell around the IPO," Kennedy says. "It's quite common for someone involved this long with a company to sell."

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