Sunday, October 27, 2013

Wealth Matters: Twitter Tantalizes, but Beware the I.P.O.

On Thursday, the company announced it would set its stock price between $17 and $20 a share, an amount that would earn it roughly $1.3 billion, and move the sale up to Nov. 6.

While it’s a much-anticipated event, it’s a little too soon to tell whether it will generate the same frenzy as the Facebook I.P.O. last year. Or whether, given Facebook’s disastrous debut — technical problems, and an initial drop in the stock’s value of more than 50 percent — Twitter’s owners want to manage expectations.

Twitter is far from alone in going public this year; there have been over 160 other I.P.O.’s so far. But Twitter’s prominence offers a good moment to stop and ask: Should any individual investors buy into an initial public offering, and if so, how should they think about doing it?

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. Of those offerings, the top three sectors were energy, financial services and health care companies. Technology was in fifth place, with just 12 percent of the offerings.

Twitter is the type of I.P.O. that creates attention that others like USA Compression Partners, the first company to go public in 2013, or Evertec, the largest technology I.P.O. of the year to date, cannot. (USA Compression makes equipment related to shale drilling; Evertec processes payments from Latin America.) And that might entice people to try to buy the stock without thinking it through.

“The market for I.P.O.’s is as strong as it has been in some time,” said Brian Conroy, president of Fidelity Capital Markets. “The more brand recognition a company has in the marketplace, the higher probability it will attract a greater share of investors, all things considered.”

But excitement for a brand and financial success are not always related. Recall and its ubiquitous sock-puppet spokesman: the company liquidated the same year it went public, though the sock puppet had a second career.

With I.P.O.’s, there are more subtle risks than total failure, particularly for an investor who is jittery or thinks I.P.O.’s go up in value as they did in the late 1990s.

Advisers I heard from said, simply, don’t do it — at least not as a stock-picking opportunity.

“Everyone remembers the big winners,” said Joe Jennings, investment director for the Maryland region of PNC Wealth Management. “Most people don’t remember the I.P.O.’s that flamed out after the initial offering.”

For clients who persist, he reminds them of three things. Information on the company ahead of an I.P.O. is usually limited. Investing with the intent to sell the stock at a quick profit is risky, if not a recipe for disaster. And larger offerings often mean more hype, which can cloud people’s judgment.

“With any investment it comes down to basics,” Mr. Jennings said. “Do you understand the long-term thesis? How does it fit into your own portfolio and your goals and objectives?”

While Mr. Jennings is an outsider looking in on companies, even some insiders will admit that they know less than people think they do about a company’s I.P.O.

Peter Stern, who has been successful in starting and selling several companies, including Datek Online to Ameritrade, said he sold a company he started to Facebook for stock before the company’s I.P.O. He turned down larger, cash offers from several suitors, he said, because he believed in Facebook’s story and said his employees wanted to work there. (He declined to name the company, but a look at his biography shows it was Zenbe, an e-mail program.)

Yet he said he considered those Facebook shares to be a “lottery ticket,” and in those early days some employees panicked and sold when their lockup period expired. Those who did not were the ones who realized they still had their salary to live on and could take a chance.

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