How I Will Play the Twitter IPO

How Will I play the Twitter IPO?

A recent filing with the Securities and Exchange Commission was done so on a confidential basis. It was an S-1, the filing form for an initial public offering and the subject company was twitter.

Twitter will disclose its financials shortly before it heads off to a road show, but that shouldn't happen until we are in November. The likelihood of a late November or early December first trade seem quite strong.

How will I play the IPO? Well I am not the best client of Goldman Sachs and few people are, but I can still find a way to play the IPO right now and look at how a portfolio manager might view it as well.

The Venture Capital Route

GSV Capital (GSVC) is one of the top Twitter plays, but it probably isn't the best. The company is a closed-end management investment company, which is a long way of saying that it acts like an venture capital firms. It holds shares in several private companies and makes its own shares available to the public.

Often times, a closed-end firm like GSVC will end up consistently offering shares to the public in hopes of raising more capital that it can then invest in early stage companies like Twitter. That makes a long term investment in these companies a difficult prospect for many investors and the dilution will make it hard for those stocks to achieve a Zacks Rank #1 (Strong Buy) or #2 (Buy).

To drive home the point about what is going on at GSVC, skip ahead to 22 minutes mark.

On the positive side, GSVC hold about $37.6M worth of Twitter stock and that translates to 15% of the total investable portfolio for the company. They also hold interests in Dropbox and Coursera.

The ETF Route

Global X Social Media Index ETF (SOCL) is another route that investors might want to take if they are not in line to take part in hot issue IPO's through they brokerage. This spreads the risk out a little more than just owning the stock of one company, but it doesn't give you full diversification.

what you also get is a couple dozen other Social Media names, with the top two names (in terms of % of the index) being from Asia. That may not be the ideal risk quotient that you are looking for, but there is little doubt that Twitter will be added to this ETF as soon as it can.

This ETF carries a Zacks Rank of 3 (Hold) and the ETF Risk is "High.:

How A Portfolio Manager Will Look At It

Facebook (FB) and Yelp (YELP) are two of the prominent names in the social media space that are likely found in the above mentioned ETF. They may also be names in your personal portfolio. And if a portfolio manager has had the ability to buy them (and wanted to beat the market) they likely hold them too.

Facebook is a Zacks Rank #2 (Buy) while Yelp (YELP) is a #3 (Hold), but how is the portfolio manager going to look at each with a week or so to go before the Twitter IPO?

Portfolio Managers have many choices, but ultimately it’s a decision of buy, hold or sell. Will they allocate more of the current portfolio to social media stocks, and run the risk of being overweight a risky sector of the market? More than likely, they will look to sell a portion of most of the other social media names (like FB and YELP) but will want to hold the ones that hold the most future potential.

Given the recent large moves in both names, FB and YELP might present smaller investors with a chance to take some profits and allocate some of that cash into a new name like Twitter. This strategy could play out for smaller investors, but could be an opportunity for those looking to add to existing positions.

Summary

Twitter is going to be a hot issue. There are a few ways to play it right now, but they also carry a high degree of risk. Alternative social media names have had a big run, but some investors make look to reduce position sizes to avoid being overweight in a risky sector of the market. But how will I play it? Easy, I will buy it about 30 minutes after it first trades.

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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy.

Follow Brian Bolan on twitter at @BBolan1

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