Twitter recently filled for an initial public offering, which leaves investors scrambling as to how to play the IPO. Here are two possible moves and what a portfolio manager will consider.
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 seems 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 a venture capital firm. 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 Strong Buy or Buy.
On the positive side, GSVC holds about $37.6 million worth of Twitter stock and that translates to 15% of the total investable portfolio for the company. It also holds 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 IPOs through their 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 percent 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 Hold rank and the ETF Risk is High.
How a portfolio manager will look at it
Facebook (FB) and Yelp (YELP) are two 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 Buy while Yelp is a 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 have 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.
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.
Brian Bolan is a Stock Strategist for Zacks.com.
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