Twitter stock shot from its opening of around $35 per share to almost $75 before pulling back. This has all the makings of a dot.com bubble stock of the late 90’s, with no earnings, only a few shares available for trading, and lots of public enthusiasm. As happened then, while Twitter may end up being a great company to own eventually, but holding at these prices would be foolhardy (that’s polite for stupid).
You see, what happens in these events is that there are only a few shares that aren’t locked up for sale by the insiders, so it is much easier to cause the stock to move up in price than it would be if there were a lot of people offering shares. This makes the company look a lot more valuable than it really is. Once insiders are able to start selling their shares (often there is a holding period after the initial public offering), they flood the market, causing the share price to collapse. In cases like Amazon and Yahoo, the stock price may come back after the crash and even exceed the highs seen during the bubble. That may take years, however. It is therefore better to wait to buy after the bubble has burst – basically when no one else want’s to own it.
Still, you don’t want to try to short the stock. Just because the price is high doesn’t mean it can’t go higher. With the limited number of shares, if the price starts to go up again and short sellers need to cover their positions, the price could easily go up 50% or more before you can cover. Twitter might also be bought out by some foolish company, like how America Online was bought out by Time Warner in the 1990’s. (Does anyone’s computer say. “You got mail,” anymore? They used to own, like, 75% of the market!)
So don’t try to short Twitter. If you own some shares, however, it would be wise to quietly lock in your gains by selling just after the new year and wait for the eventual collapse to buy in again. If you are looking to buy, maybe look at Amazon or Ebay instead.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.