Dear Mr. Berko: I'm ashamed to admit that last April, I bought 300 shares of Twitter at $51. As you know, the price is lower today by almost 13 points. But I'm grateful that I took your advice not to buy the stock in January 2014, when it was trading at $70 and you told me, "Twitter is worth a pig in a poke, and in five years, it may be worth a poke." Do you think I should sell this stock or hold and hope that it will come back to my purchase price soon?
Also, my 67-year-old dad just sold a fixer-upper he had been working on for seven months and will net $61,000 after taxes. Dad would like to invest this money in municipal bonds. He was looking at some of the municipal bonds issued by Puerto Rico and Illinois that have yields better than 20 percent. Do you have any recommendations here? Do you think this is too speculative? — NE, Springfield, Ill.
Dear NE: In the past dozen months, Twitter (TWTR-$38) has fallen from a high of $55, and I suspect that in the next dozen months, TWTR will fall to the low $30s or high $20s. This social media stock has increased revenues sixfold, from $315 million in 2012 to an expected $2 billion this year. And those revenues will probably continue to grow (helped by acquisitions) over the next few years, though at a significantly slower pace. However, since coming public at $26 with 70 million shares in November 2013, the company has enjoyed consecutive yearly losses totaling nearly $2 billion. This seems to be the trend of most social media stocks. LinkedIn (LNKD-$221) is down 76 points from its high, and Yelp (YELP-$47) is down 38 points from its high last year. And the smart money seems to believe that these issues will continue to decline.
Last year, digital advertising generated $145 billion in revenues in the U.S. and over $600 billion worldwide, and it continues to grow at a strong pace. However, digital advertisers are becoming smarter and demanding better returns on their digital dollars. And TWTR's advertising revenues fell short of management's expectations, causing the company to post a first-quarter loss of $162 million. Now it appears that the returns advertisers earn from the social media sites are lower than returns earned from other Internet platforms. Why did it take advertisers so long to get the message? The psychological implications here and economic metrics tell a fascinating story. Investors are finally beginning to question whether social networks can maintain growth rates strong enough to justify their high enthusiasm. Today a growing number of doubting Toms believe that TWTR's advertising dollars will generate low returns and remain vulnerable to slower growth. The research gurus at Schwab, Ned Davis Research, Stifel Nicolaus, Value Line and Market Edge agree.
Yep, there are a multitude of Puerto Rican bonds yielding better than 20 percent, and the income is tax-free. The University of Puerto Rico's revenue bonds have a 5 percent coupon, mature in 2016 and are priced at $840 per $1,000 face value. That's a yield 22 percent to maturity. Puerto Rico's Government Development Bank bonds have a 4.7 percent coupon, mature in 2016 and are priced at $740 per $1,000 face value. The yield to maturity is 39 percent. There are many similar Puerto Rican municipals.
Illinois, which is a bit closer to home, also has baskets of high-yield municipals. The Illinois Financial Authority's Series B revenue bond for the Park Place project in Elmhurst has a 7.75 percent coupon and matures in 2020. It trades at $450 per $1,000 face value, and the yield to maturity is a sweet 29.5 percent. There are numerous Illinois municipals with similar yields. However, owning those bonds and expecting a payoff reminds me of the fellow who drops a rose petal from the rim of the Grand Canyon and waits, expecting to hear an echo when the petal lands. Your dad seems to know his real estate in Springfield. Tell him to stop playing Russian roulette with high-yield junk and buy another fixer-upper.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.