Twitter has an initial public offering (I.P.O.) for 70
million shares coming in a couple of days and has confidently upped the price
range by about 30 percent in the last week. The new price range ($23-$25) will
give Twitter around $1.7 billion to finance its growth.
These high profile I.P.O.’s beg the question: Should
individual investors buy into an I.P.O.?
According to research from Fidelity Investments, the
number of I.P.O.’s so far this year is up 40 percent from the same point last
year, and the dollar values of those offerings has increased 10 percent. Sounds
like a good deal for investors on the surface, but think back to the last high
profile tech I.P.O., Facebook’s I.P.O. was a disastrous stock debut.
Twitter is the type of I.P.O. that creates all kinds of media
attention which might entice people to try to buy the stock without doing
enough (or any) research. The more of a household name a brand is the higher the
probability it will attract a greater number of investors but excitement for a
brand and financial success are uncorrelated.
I.P.O.’s don’t just rise in value as they did in the late
1990’s. There are many more flameouts than winners in this market, but most
people don’t remember the losers, it’s not wired into our optimistic DNA.
(Which is another reason to use a professional advisor, we are like Missourians
in that we tend to say, “Show me.”)
For instance, information on the company ahead of an I.P.O.
is limited (although there are exceptions). And larger offerings like Twitter’s,
often mean more hype, which can cloud an individual investor’s judgment.
Remember, as with any investment, it comes down to the fundamentals, current
financials and long-term growth prospects. Not to mention, security fit in your
overall investment strategy.
Buying with the intent to quickly flip the stock at a
profit is a recipe for disaster. Even Wall Street insiders admit they can’t
predict the future. A better approach may be to look at what a company does and
ask if it is something that will be needed in the future. As always, take the long-view
with stock investments. Is the company going to around for the next ten years,
if you believe so, maybe the better strategy is to find several stock companies
in that industry sector and buy a basket of stocks.
Conversely, not buying the I.P.O. does not mean you
should forget about the company. If an investor bought Facebook shares at their low of
$18 three months after the I.P.O they have a nice gain currently. Seventeen
months after the I.P.O. the stock is trading around $52 a share.
Finally, if it’s something you know about and you have an
insider’s perspective on it, an I.P.O.is a way to gamble on that perspective, with
maybe better odds due to the depth of your knowledge. Put another way, if you
have 20 years in tech and are determined that social media has continued upside
for the foreseeable future, buy that I.P.O., but remember, it’s still a bet.
CBlakely CFP®,
CTFA 11/2013
Source: New York Times - Business Day, Fidelity
Investments
