This month’s big IPO story has been all about the successful launch of the social media darling Twitter (TWTR). Nearly every media outlet and market watcher has been vocal about the pros and cons of owning Twitter stock.
There obviously is huge potential for a company with millions of established users and an innovative method for sharing information worldwide. However, TWTR has yet to figure out an immediate path to profitability and is focusing on long-term solutions to add value for both shareholders and customers. That balancing act can often times alienate one or both sides, as they often have conflicting agendas.
In the wake of the orderly TWTR debut, many investors are now questioning: What is the best manner to own Twitter stock, and when should they consider purchasing it?
If history is a guide, the immediate backlash from high-profile social media or technology IPOs is typically negative. If you look at the first several months of trading from Facebook (FB), LinkedIn (LNKD), Yelp (YELP) and Groupon (GRPN), you can see a persistent downward trend develop as the excess hype is worked off. Once a bottom sets in, the stock price typically flies with tremendous momentum and volume.
This phenomenon might be a result of institutional and retail investors getting a closer look at the company’s strategy, financials and roadmap for the future which encourages ownership and confidence in the stock. In addition, as the stock collects history on the exchange, it eventually will be incorporated into widely held indices and funds that boost the share price as well.
If you are bullish on the long-term prospects for Twitter stock, then by all means feel free to jump headlong into the fray and purchase the stock for the long run. Most investors won’t be able to perfectly time the bottom and ride the ensuing strength if the company beats Wall Street expectations. Right now the stock is trading below its opening price, which is better than buying on day one.
If you are like me and want to diversify your industry exposure, consider purchasing an ETF that holds Twitter stock such as the Global X Social Media ETF (SOCL) or the Renaissance IPO ETF (IP). Todd Schriber of ETF Trends recently reported that TWTR was set to join these funds this week.
With SOCL, you get exposure to a variety of social media stocks in a single package that includes many of the names mentioned above. IPO, on the other hand, invests in a wide spectrum of newly minted public companies with economic significance.
In addition, I would not be surprised to see more technology or Internet-related ETFs pick up some exposure to TWTR within the next 90 days as their indices are rebalanced. The allocation size of the stock within each ETF will largely depend on the construction and rules of the underlying index.
Lastly, we are bound to start seeing actively managed mutual funds and hedge funds begin to acquire shares as aggressive managers pounce on the opportunity to add a fresh name to their portfolio. The temptation for performance chasing into the end of the year will be an opportunity to increase their stock exposure as we head into 2014.
Unfortunately, most mutual funds don’t report holdings more than once per quarter, so we won’t know exact allocation amounts until early next year.
With so many different ways to add Twitter exposure to your portfolio, my one recommendation is to not get caught up in the hype. Make sure that you have a well-thought-out plan for accumulating a position that is commensurate with your time horizon and risk profile. That forethought will serve you well as we make our way through a choppy market.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Learn More: Why I love ETFs, And You Should Too.