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What Analysts Expect When Compass Share Freeze Ends



Robert Citrone, co-founder of Discovery Capital Management; Masayoshi Son, CEO of SoftBank; Robert Reffkin, CEO of Compass; Ori Allon, Founder and Executive Chairman of Compass (Getty Images)

About 200 million shares of Compass could hit the market on Tuesday when restrictions on the brokerage’s initial public offering are lifted.

The end of the 180-day lock-in period, which prevented Compass’s major shareholders, directors and officers from selling their stakes, means the companies’ free float – the shares that can be traded – will more than double.

What happens when all of these stocks become tradable tomorrow will depend on the patience of investors and their perspective on Compass’s business model. The company has been both praised and criticized for its rapid growth, fueled by acquisitions and aggressive recruitment of top agents from competing companies.

“It’s an indication of the confidence they have in the company,” said David Trainer of New Constructs. The trainer’s investment research firm rates the action as “unattractive,” the equivalent of “selling,” citing the company’s expenses and its failure to “create lasting competitive advantages.”

Certain investors who bought at the pre-IPO price of $ 18 a share are subject to the lock-up. At Monday’s $ 13.54 close, those shares were down about 25%. Investors who bought at the starting price of $ 20.15 when it debuted on April 1 on the New York Stock Exchange are down about 33%.

Compass insiders subject to foreclosure include major shareholders and venture capitalists who have contributed $ 1.5 billion in pre-IPO funding since the company’s inception in 2012. The board of directors, founders , CEO Robert Reffkin and executive chairman Ori Allon of Compass, along with the holdings of other key executives were also subject to the six-month freeze.

Analysts are divided on Compass’s long-term outlook, although most expect stocks to move lower when the lockdown lifts, at least initially.

New constructions short-circuited Compass since its IPO until the end of August and said the short position exceeded expectations by 36%. During that time, the Compass stock price fell 24% from the S&P 500’s 11% gain.

Oppenheimer’s Jason Helfstein gave the brokerage an “outperformance” rating with a target price for Compass shares of $ 25. Helfstein said he expects Compass to repeat the pattern that typically takes place when insiders are able to start trading their holdings on the stock market: stock prices fall at the end of the lock-in period, then then straighten up.

In July, after Compass shares fell about 39% since their inception, Helfstein said the brokerage firm’s lack of liquidity was the main factor holding investors away, not its business. If so, this issue could be resolved by the end of the lockdown.

The elephant in the room is Softbank, which owns 33.5% of Compass, and has not indicated its plans.

“Softbank owns a third of the company, so the question is what are they doing now?” Helfstein said.

In July, Softbank, among the world’s largest technology investors, sold 45 million Uber shares worth around $ 2.1 billion in a block deal through Goldman Sachs. Last month, the company again sold 11.4 million shares worth about $ 2.2 billion of Doordash through a block transaction managed by Goldman Sachs, Bloomberg reported. The recent sale came after Softbank’s investment in Chinese rideshare company Didi Global collapsed. The company’s shares have fallen about 43% since its IPO after Chinese regulators banned from the country’s app store pending a security review for suspected violations in the processing of personal data.

Softbank owns more than 132 million Compass shares, according to Yahoo Finance. The second largest holder is Discovery Capital Management, with 33.6 million shares, or nearly 9% of the company.

Other investors who backed Compass in its pre-IPO fundraising efforts are also subject to lock-in deals, according to the leaked information. These investors include Institutional Venture Partners, which also backs Coinbase and Robinhood, and owns a 3% stake in Compass. Wellington Management Company owns 10.6 million shares, or 2.69% of the company, while Winslow Capital Management’s 7.8 million shares and Joshua Kushner’s 7 million shares of Thrive Capital are barely 2% .

Fidelity Investments, which conducted a Funding of $ 100 million round for Compass in 2017, owns approximately 6 million shares representing 1.5% of the brokerage. The Canada Pension Plan Investment Board owns 3 million shares, and hedge funds Zimmer Partners and Alta Park Capital own approximately 2.3 million shares each.

The brokerage’s lock-in period could have been shorter if its stock price had risen 25% for five of 10 consecutive trading days from its original offering price of $ 18. That would mean Compass shares should have traded for around $ 22.50 for at least five days in a 10-day period, which never happened.

Investors are short of 4.64 million shares as of August 31, representing 2% of the float traded and 1.18% of all outstanding shares. This is down from short interest of 6.37 million shares at the July 7 close.