Tweeter vs. Twitter

Posted in: Economics, General, Stock Market, Thought of the Week

On October 1, Twitter made its initial public offering (IPO) filing public, which is the most anticipated IPO of 2013. Twitter announced that their stock ticker will be “TWTR”. The excitement from the messaging service selling shares to the public has created media frenzy as investors await the opportunity to buy shares in the next hot internet IPO.

On October 2, shares of Tweeter Home Entertainment surged as more than 14.3 million shares were traded. Tweeter is a defunct Massachusetts-based electronics retailer that filed for bankruptcy in 2008 and shut its stores later that year.  At the time, Tweeter’s ticker was “TWTRQ” and traders got confused and thought that Twitter had already started to sell shares one day after filing with the SEC. By the time FINRA halted trading on the stock, shares were up nearly 700% on the day!

The lesson to learn here is that IPOs are extremely risky and particularly those that receive media attention.  Our Investment Committee has a belief that the more hype surrounding an IPO, the more risk one presents investors.  The actions surrounding Tweeter’s stock last week is a prime example of what can happen with IPOs. First, usually we don’t see shares actually sold to the public for three weeks after filing their S1 with the SEC. Second, the share price is still unknown which indicates that market participants were willing to buy with no regard to valuation. Finally, the stock symbols did not even match up exactly, but market participants continued trading in a stock priced less than $0.10, which is extremely low for a newly released IPO.

The bottom line is that although IPOs sound exciting and most investors would love to brag about how they got in early on the next Google, our Investment Committee believes they represent too much risk in our portfolios. The best idea is to stay away from the stock until the fundamentals begin to drive the stock.  Read this week’s Thought of the Week to learn more about IPOs and the risks associated with them.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.