I have cautioned you before against investing in rumors, regardless of the source. But I recently bought into one myself. Before you call me a hypocrite, let me explain.
The stock in question is Office Depot (ODP). A local small-business owner who dabbles in the market told me he’d heard a rumor about ODP being the target of a hostile takeover. As I always do with any stock of interest, I checked three things:
- ODP’s chart (It looks like it has put in a double-bottom at the $10.80 level.)
- the sentiment indicators (Analysts don’t think very highly of this stock. All 10 are rating it as a "hold.")
- its fundamental stats (The fundamentals don’t look very good at this point, but it appears that all the company’s troubles may be out and on the table.)
So what did I do? I bought some long-term calls on ODP that don’t expire until January 2010. I only bought a few, but if the company is going to turn around it should be within the next 12 to 18 months. If they do get a hostile takeover bid, the stock could shoot up from $11.70 to $17 real quick.
So there you go. If you’re going to listen to a rumor, this is how you should play it.
ODP was brought to my attention by a takeover rumor. That’s what made me look at it twice. But that’s not what made me buy. In the end, I made a bullish play on the stock because of the same three things I always look at: technicals, sentiment, and fundamentals. I encourage you to do the same. Don’t buy into rumors. But if the stock happens to fit your investing criteria, go ahead and make the trade.
[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick's new investment service, he gives easy-to-follow, step-by-step advice that you can use to create a consistent, automated income. Learn more about how he can help you produce explosive gains - no matter which way the market is trading - here]
Similar Articles:
- Learning About Charts – The value investor argues that fundamental analysis is better. The trader argues that technical anal…
- Navigating the New Market – Since the first day I started working in the stock and bond business, the old timers – the guys I ha…
- Bruit About – To “bruit (BROOT) about” – from the French for “to roar” – is to repeat or spread a rumor. Example (…
- Not for the Faint of Heart – While meteorologists were plotting Hurricane Gustav’s course, uncertainty about exactly where it wou…
- Why I Bought the Same Exact Shoes Twice – Here’s one company that knows the best person to sell shoes to is… someone who just bought shoes. Ab…
- Know When to Say When – We have all been there… Sitting at a bar, head in your hands, you’re wondering how it happened. Ho…
- Is the 2009 Market a Market of Stocks or a Stock Market? – I have been beating the bullish drum rather loudly of late, because I think 2009 will be a good year…