Insiders’ Sales Could Cool Hot Internet Stocks

Good thing the public is so in love with Internet stocks: Top executives and other insiders at Net firms have lately been heavy sellers of their own shares--and their selling may soon increase as self-imposed sales restrictions expire.

While corporate insiders at many U.S. companies were buying their own stocks in recent months, 168 executives at two dozen Net-related companies have sold almost 12.8 million shares since October, according to CDA/Investnet, a Rockville, Md., firm that tracks insider buying and selling.

“There is an explosion of selling in the Internet stocks,” said CDA President Robert Gabele.

Insider selling could come from new quarters in the next few months as so-called lockup periods expire for Net companies that went public in 1998.

Lockups are promises by high-ranking insiders to refrain from selling personal shares immediately after a company’s initial public offering, or IPO. Without lockup agreements, investors might shy away from buying IPOs out of fear that heavy insider sales immediately after the offering would quickly depress the stocks.

In the next five months, however, lockups will end at several well-known Internet firms, including EBay, UBid, EarthWeb, Theglobe.com and Ticketmaster Online-CitySearch.

Of course, because their holdings often are substantial, insiders are unlikely to dump enormous blocks of stock at once. Doing so could spook investors and provoke massive sell-offs.

“It would be suicide,” said William Smith, president of Renaissance Capital Corp., a research firm in Greenwich, Conn., that specializes in IPOs.

But even moderate insider sales could noticeably affect some stocks because their current “float,” or number of shares in public hands and available to be traded, is relatively small.

Indeed, that limited supply has been a prime force driving up Internet stock prices as the public has bid wildly for the shares.

Historically, stocks have often slid in the weeks before an IPO lockup expires, as some investors sell in anticipation of new shares hitting the market and pulling the price down.

Concern about the Jan. 21 expiration of EBay’s lockup may have contributed to a recent skid in the online auction firm’s shares. Before recovering in the last two days, EBay sank 26% in the previous two weeks even as the broad Internet sector kept climbing.

Investors also may have viewed EBay’s 120-day lockup, which is less than the 180 days that is common at other Internet companies, as a sign that insiders are eager to sell.

Most observers expect Net insiders to do some selling when lockups expire, given the stocks’ extraordinary advances. Insiders may well worry about how long the stocks will stay at current levels.

“It’s very tempting to go out and sell the stock,” said Tom Taulli, market analyst at Silicon Investor, a Web site specializing in technology stocks.

If public demand for the stocks remains voracious, lockup-related sales may not hurt prices much. Indeed, Broadcast.com’s lockup expired Wednesday--yet the stock zoomed $40.44 to $132 on Thursday.

However, the impact will vary from one company to another and may depend on how the shares are sold, said Francis Gaskins, editor of the Gaskins IPO Desktop Web site, which follows Internet IPOs.

Insiders can dispose of stock by selling it individually over time, or a group of insiders can package their shares for sale in a so-called secondary offering similar to an IPO.

In general, it’s better for the shares to be sold in a secondary, Gaskins said. Though the stock hits the market all at once, rather than incrementally, most companies employ brokerages to line up buyers in advance.

However, only the strongest and hottest companies enjoy enough demand for their shares to accomplish secondaries, Gaskins said.

He estimates that EBay, UBid and Ticketmaster could pull them off. But EarthWeb, GeoCities, Theglobe.com, Xoom Inc. and Cyberian Outpost might not be able to, he said.

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Will Demand Match Supply?

Corporate insiders of Internet companies that went public last year will soon be released from “lockup” provisions that keep them from selling their shares in the open market. Lockup expirations this year for some Net firms, and the number of shares that could be sold versus recent average dadily trading volume:*--*

Date Lockup Recent avg. Thurs. lockup shares Stock Ticker close expires (mlns.) Broadcast.com BCST $132.00 1/06 14.4 Cyberian Outpost COOL 32.19 1/20 18.0 EBay EBAY 298.00 1/21 34.8 GeoCities GCTY 40.88 2/06 25.9 EarthWeb EWBX 43.44 5/09 5.8 Theglobe.com TGLO 35.50 5/11 6.7 Ticketmaster TMCS 53.25 5/31 62.5 Ubid UBID 119.25 6/01 7.3

daily share Stock volume (mlns.) Broadcast.com 0.25 Cyberian Outpost 1.21 EBay 1.11 GeoCities 0.33 EarthWeb 0.52 Theglobe.com 0.78 Ticketmaster 1.29 Ubid 2.72

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Source: Renaissance Capital Corp.

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Allocation Strategies

A sampling of recommended asset weightings from Wall Street firms. Assets are broken down into stocks, bonds and “cash”-- or short-term liquid securities--and the weightings are listed in descending order of stock percentage:

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Strategist Company Stock Bonds Cash Jeffrey Applegate Lehman Bros. 80% 20 0 Thomas Galvin Donaldson Lufkin & Jenrette 75 20 5 Don Hays Wheat First Union 70 30 0 Abby Joseph Cohen* Goldman Sachs 70 27 0 Ray Worseck A.G. Edwards 70 25 5 Peter Canelo Morgan Stanley Dean Witter 70 20 10 Greg Smith* Prudential Securities 70 20 5 Ed Kerschner PaineWebber 61 23 16 Liz Mackay Bear Stearns 60 35 5 Christine Callies Credit Suisse First Boston 60 30 10 Douglas Cliggott J.P. Morgan 60 25 15 Committee Salomon Smith Barney 55 40 5 Gail Dudack Warburg Dillon Read 45 30 25 Charles Clough Merrill Lynch 40 55 5 Average** 63 29% 9%

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* Goldman Sachs also suggests placing 3% of assets in commodities. Prudential Securities also recommends placing 5% of assets in real estate investments, including REITs--real estate investment trusts--and shares of development companies.

** Totals do not equal 100 percent because of rounding.

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Expectations for the Dow

A sampling of 1999 year-end targets for the Dow Jones industrial average, listed in descending order of bullishness:

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Strategist Company Expected Dec. 31 close Laszlo Birinyi Birinyi Associates 12,010 Tom Galvin Donaldson Lufkin & Jenrette 11,000 Ralph Acampora Prudential Securities 10,500 Barry Hyman Ehrenkrantz King Nussbaum 10,100 John Manley Salomon Smith Barney 10,000 Al Goldman A.G. Edwards 9,900 Abby Joseph Cohen Goldman Sachs 9,850 Ed Kerschner PaineWebber 9,750 Douglas Cliggott J.P. Morgan 9,300 Don Hays Wheat First Union 7,500 Average 9,991

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Source: Bloomberg News