Twitter's IPO: Skip the madness and wait 90 days

A picture taken on October 23, 2012 shows the screen of a blackberry phone featuring a page with the adress of the micro-blogging site Twitter website. AFP PHOTO FRED TANNEAU (Photo credit should read FRED TANNEAU/AFP/Getty Images) FRED TANNEAU

(MoneyWatch) Say "IPO" and watch investors' eyes twinkle. Add Twitter and they start to glow. The hot tech company is catching attention for its upcoming initial public offering. Twitter just announced it would price its shares at $17 to $20 during the IPO.

That's an $11 billion valuation, which is less than the $15 billion some analysts expected. (Remember that the valuation -- how much the whole company would be worth at a given share price -- is different from the amount of money a company plans to raise, which Twitter has set at $1 billion.)

The price may go up before Twitter officially goes public, but any time companies keep a lid on expectations, it means someone -- the investment bankers -- don't think they can get more from investors. It's a clue that instead of chasing early shares of Twitter, most people would be better off finding more realizable value in the markets.

There are already big red flags when it comes to investing in Twitter. They include the lack of any profit, slowing growth, and confusing financial metrics, to name a few.

In addition, there is the general issue that only the insiders and big institutional investors get the lowest prices at an IPO. Everyone else buys shares after they are resold, which can mean a big jump in price. If a company can't maintain the share price, as happened with the hyped Facebook (FB) IPO, you can suddenly find yourself in the red on that investment. That's why Kiplinger's publications strongly suggest that people wait at least 90 days before buying an IPO stock. It gives the company a chance to settle down and a better sense of where the stock will actually trade.

This approach paid off handsomely with the Facebook IPO. The stock debuted on May 18, 2012, at $38. By session's end its price had gained just 23 cents, defying widespread predictions of a massive first-day pop. Three months after the IPO, Facebook was down to $20. Opportunistic investors who bought at that point have since enjoyed a 160% return (all prices as of October 17).

Another interesting example of the 90-day cool-off period is Yelp (YELP). It went public in March 2012 at $15 and quickly jumped to $24. If you had waited until early June, the price was down near $15 again. Today? The stock has been running between the mid-$60s and better than $70. Even then, it took until November 2012 for the price to begin its long-term rise.

If you're interested in tech almost-IPOs, the critical step is to let a little time go by and then undertake due diligence by looking at analyst reports, pouring through available financials, and following news about the companies. Among other things, look for profit, a positive cash flow, and growth. You may not find all three, but if more than one is missing, wariness would make sense. Don't invest anything until you have seen at least one quarter of financials reported after the IPO, which would fall in line with the 90 day rule. Also skip companies that seem to pay unreasonable sums to top managers, as there is little correlation between the size of CEO pay and market success.

There is a tidy bunch of recent tech IPOs, including digital security company FireEye (FEYE), ad network Rocket Fuel (FUEL), and Benefitfocus (BNFT), all of which saw double-digit percentage increases in stock price in the first 30 days. Now you just need to wait a bit longer to see if there seems to be something behind the immediate success.

  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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