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Putting money into social media companies has not been the best move for investors over the past year. Most social media companies have over inflated valuations, which have lead to unhappy investors and multiple lawsuits citing that the companies misled investors prior to their IPOs. These same companies are now suitable candidates for short sellers, as shares swing to unpredictable highs from unprecedented lows. It seems that every social media company that tanked in 2012 and has shown signs of trending up since the last quarter has investors jumping on board to sell at a profit. Short sellers are now piling onto companies such as Facebook (NASDAQ: FB), Zynga (NASDAQ: ZYNG), and Pandora (NYSE: P).

FB shares sold short rose more than 12 percent to 28.49 million in February following an increase of more than 26 percent in the previous quarter. In fact, the end of February saw the highest level of short interest in the company thus far this year. Still it was well short of the 95 million share peak of last November. The company's long-term EPS growth forecast is more than 29 percent and the return on equity is less than one percent. The P/E ratio is an unreal 1,726.00 for the trailing twelve month period. FB shares are currently trading down, in the same neighborhood as at the beginning of the year, around $25.80. Although the mean price target indicates an upside potential of more than 17 percent, it is well below the post-IPO high set back in May. Still, share price is more than 34 percent higher than six months ago. In the past six months the stock has outperformed Google and the broader markets. Based upon recent history, it is doubtful that any type of run can be sustained, marking FB as a short seller's dream.

LinkedIn (NYSE: LNKD) is a prime example of an overvalued entity. After its last quarter report, the company now trades with a P/E ratio of 912 and a price/sales ratio of more than 17.5. Those numbers would apply to a company that has had years of explosive growth and LNKD has not had years of explosive growth. Short interest fell by 15 percent, to 3.82 million shares in the final weeks of February. That's the lowest number of shares sold short in a year, yet it represents more than 4 percent of the float. The current share price is higher than the mean price target. This indicates that analysts see no upside potential at this time. The price per share is more than 95 percent higher than a year ago. Over the past six months, the stock has outperformed the likes of Facebook and Google. Again, I doubt that growth like this can be sustained. It's only a matter of time before the fall.

So, where does this leave small caps that are making their way in the sector? These are companies that are waiting in the wings to challenge the large players and possibly have the next best products and platforms in the industry. Investors should seriously consider small-cap social media companies such as RealNetworks (NASDAQ: RNWK) and WebMediaBrands (NASDAQ: WEBM) for long-term plays because there is plenty of room for growth and neither company is experiencing the volatility of larger entities, such as Facebook.

MEDL Mobile Holdings Inc. (OTCBB: MEDL.OB) is another small-cap player with the chops to carry it as high and as far as the best of them, and the product to back it up. Wednesday saw stocks surge by 8.65 percent for mobile app pioneer MEDL. The rise came on the heels of the company's public release of its patent-pending "Hang w/" live social mobile video platform. The app has garnered approval for release by Apple (NASDAQ: AAPL) and is now available for download via the Apple App Store. The long-awaited launch of this new app provides MEDL with an important new channel of advertising revenue. It also leverages the company firmly into the social media sphere along with the likes of Facebook, Twitter, Pandora, United Online (NASDAQ: UNTD), and Google. The stock is trending up and will continue to do so as Hang w/ gains traction.

If you're attracted to the larger companies, bear in mind that now is optimal to invest for short-term action. Prices are trending up but be prepared for pullbacks. The bottom line is that any way you cut it, investing in social media is not a guaranteed return. Just look back to the Zynga and Facebook IPOs as a reference. It will be interesting to see what happen with Twitter's IPO later this year.

Source: Social Media Investing For 2013