Technology Index Funds Put Twitter On Sale - Forbes

Hostile Senators could not push Twitter below $30, but the S&P/MSCI did. Photographer: Andrew Harrer/Bloomberg

On Monday, Technology index funds and ETFs are no longer supposed to own Facebook, Twitter or Google. That's why nearly all Technology index funds sold their holdings of Facebook, Twitter and Google on Friday, driving the stocks down 1.86%, 4.52%, and 1.63% respectively. When large shareholders sell for reasons that have nothing to do with the company, smart investors have an opportunity to buy stock at a bargain price. Facebook and Google did not move down enough to make the trade worthwhile. But, in my opinion, Twitter did.

The Reason For The Sales

The S&P and MSCI have moved Facebook, Twitter and Google from the Technology sector to the Communications sector.

Almost all Technology index funds and ETFs are required to only own stocks that are classified in the Technology sector. Consequently, they cannot own Facebook, Twitter and Google starting Monday when the reclassification takes effect.

Why Did The Stocks Drop?

Technology Index funds and ETFs own many shares Facebook, Twitter and Google. When they have to sell at the same time, it created an order imbalance because the Communications funds had to buy much less of these stocks because their assets are much lower.

Opportunity For Investors?

For Facebook and Google, Friday's price drop was big but not big enough (by itself) to justify buying the stock. If you were considering buying Facebook or Google for other reasons, then Friday's price drop may have tipped the scales in your favor. But don't buy either stock just because of Friday's price drop.

For Twitter, however, Friday's 4.52% drop to $28.50 looks attractive.When Jack Dorsey, Twitter's CEO, testified before Congress last month, Wayne Himelsein told us that there were buyers at $30 for as much stock as they could get.

It appears that the Technology index fund sellers have filled all the $30 buy orders on Friday and then some. However, on Monday, the same funds will no longer be selling so Twitter may recover as normal trading  resumes.

My Take: It is rare that you can see with clarity the reasons why big shareholders are selling. When a sellers' reasons have nothing to do with the value of a stock it can create good buying opportunities for investors for whom the seller's reason don't apply.

Facebook and Google did not fall enough on Friday to, by itself, make the trade worthwhile. But, in my opinion, Twitter did.

Technology index funds and ETFs have sold their Twitter holdings. Starting Monday, we'll see what Twitter is worth absent the unusual selling pressure we saw on Friday. If Wayne is right, we may see Twitter recover Friday's 4.52% loss quickly.

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