A Rumor I Bought Into

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]