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Beware the frenzy over Twitter IPO

NEW YORK — Perhaps you’ve heard that Twitter is planning an initial public offering.

On Thursday, the company said 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.

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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 IPO last year. Or whether, given Facebook’s disastrous debut, Twitter’s owners want to manage expectations.

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

According to research from Fidelity Investments, the number of IPOs so far this year is up 40 percent from last year. Of those offerings, the top three sectors were energy, financial services, and health care. Technology was in fifth place.

Twitter is the type of IPO that creates attention that others like USA Compression Partners, the first company to go public in 2013, or Evertec, the largest technology IPO 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 more brand recognition a company has in the marketplace, the higher probability it will attract a greater share of investors,” said Brian Conroy, president of Fidelity Capital Markets.

But excitement for a brand and financial success are not always related. Recall Pets.com and its sock-puppet spokesman: The company liquidated the same year it went public.

With IPOs, there are more subtle risks than total failure, particularly for an investor who is jittery or thinks IPOs 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, an investment director with PNC Wealth Management. “Most people don’t remember the IPOs that flamed out after the initial offering.”

For clients who persist, he reminds them of three things. Information on the company ahead of an IPO is usually limited. Investing with the intent to sell the stock at a quick profit is risky. And larger offerings often mean more hype, which can cloud people’s judgment.

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

Even some insiders will admit that they know less than people think they do about a company’s IPO.

Peter Stern said he had sold a company he started to Facebook for stock before the company’s IPO. 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.

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.

Stern said he had learned patience from the sale of Datek Online to Ameritrade in 2002. Ameritrade’s stock fell by half after the announcement, but then rose substantially over the next 18 months.

He said investors in an IPO that doesn’t go straight up had to ask themselves the same questions that employees did: Is it worth it to hold onto stock that could be worth a lot or worthless, or do you sell some shares to reduce your risk?

A better approach may be to look at what that company does and ask if it is something that will be needed.

Chris Errico, senior portfolio manager at UBS Wealth Management Americas, said: “I don’t think the question is about buying the IPO but investing in the business long term. If you’re talking about Twitter, you have to ask, is it a business that’s going to be around for the next 20 years?”

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