6 Social Media Stocks to Friend, 4 to Shun

How to play the trend when you can't invest in Facebook or Twitter

The staggering popularity and explosive growth of social media sites like Facebook and Twitter has been a nothing short of phenomenal.

The brainchild of founder and then Harvard University student Mark Zuckerberg in 2004, Facebook now boasts over 200 million members. And micro-blog site Twitter has seen even more rapid growth. The site’s blog said it saw an average of 460,000 new accounts — per day! — in March. That’s a whole lot of “tweets” as the company calls their posts. In fact, the site now gets about a billion, with a “b,” tweets per week.

Naturally, this kind of popular adoption of products has Wall Street buzzing. Many of the smartest people in the room are trying to find ways to get in on the social media craze via direct investment in start-up companies, or just by investing in the best social media companies. Of course, with any new trend comes dislocation, and that means there will be a number of companies that take a hit as a result of this emerging trend.

For investors who want to make money in social media companies — and for those who don’t want to lose money holding stocks that could be harmed by the trend — there are stocks to embrace, and stocks to shun. Let’s take a quick look at some of stocks most affected by the rise of social media.

• The most logical social media company to own, of course, is Facebook. Unfortunately, the stock isn’t public yet. And while there are many private equity shareholders in Facebook, the public isn’t yet able to own Facebook stock. However, one indirect way to get some exposure to Facebook is by holding shares of investment firm Goldman Sachs (NYSE: GS). In January, GS announced that it was investing $450 million in the social networking site. When arguably the best investment firm in the business puts that kind of capital into a company, you know they see some serious potential. Getting in on that potential can be done indirectly via Goldman shares.

Another indirect way to gain social media exposure in your portfolio is to buy the companies that provide the devices that allow users to log on to Facebook, Twitter and the other major social sites. Here we’re talking tech stock giants, and specifically Apple (NASDAQ: AAPL), maker of the iPad, iPhone and Mac devices, and Motorola Mobility Holdings (NYSE: MMI), maker of the über-popular Droid smartphone devices.

One reason why the Droid is so popular is because of the Android operating system, and that’s the brainchild of online search site Google (NASDAQ: GOOG). This is yet another way to position your money to take advantage of the social media wave.

In contrast, a stock to avoid here is Research In Motion (NASDAQ: RIMM), as the company’s once-mighty BlackBerry smartphones aren’t nearly as popular as they used to be, nor are they as good as the iPhone or the Android phones when it comes to performing social media tasks.

Another way to gain portfolio exposure to social media companies is via stocks that service companies wanting to up their social media presence. There are a couple of companies that specialize in this. The first is Dex One Corporation (NYSE: DEXO). The marketing and e-business solutions firm is likely in the right sector at the right time, but the company does carry a lot of debt, which could weigh down its future growth. Also, the stock currently trades near its 52-week low, a clear warning sign for investors going forward.

Another similar company in the space is SuperMedia Inc. (NASDAQ: SPMD); however, this stock also trades near at its 52-week lows. Although these companies could be sound ways to play the social media boom down the road, they should likely best be avoided here until they muster up some buying momentum.

On the technological back end, there are several companies likely to benefit from the social media wave. The need for more Internet routers, storage networks, home networking devices, etc., are the province of networking giant Cisco Systems (NASDAQ: CSCO). And as Internet traffic increases due to more and more social media use, a company like Akamai Technologies (NASDAQ: AKAM) should prosper. Akamai makes services for accelerating and improving the delivery of content and applications over the Internet, a good position to be in considering the aforementioned growth in Internet activity from Facebook, Twitter and the other prominent social sites.

One company to avoid, at least in terms of its social media exposure, is News Corporation (NASDAQ: NWSA). The company bought social network MySpace in 2005, but that service is on a decided decline due to competition from rival Facebook. Although MySpace remains one of the largest social networks, it’s not the kind of site that I suspect has a robust future, at least not without some much-needed enhancements.

Finally, as soon as they go public, investors should seriously consider buying into the Facebook IPO and Twitter IPO. And while there’s no timeline here as to when these two social media leaders will go public, you can bet the shares will be on fire when they hit trading floors — and that will really be something worth tweeting about.