Rule No. 10: Bad Buys Won't Become Takeovers
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Nothing's more exciting than a takeover. Nothing's as lucrative. You can put on a lifetime's worth of moves in a day from a takeover. So people go to great extents to try to get them, including buying a lot of bad companies in the hope of catching one takeover.
Funny thing about bad companies: They rarely get bids. In fact, the companies that get bids are great companies with cheap stocks, not crummy companies with expensive stocks. Yet that's what people buy, all the time.Here's my rule:
Never speculate on companies with bad fundamentals.The odds are that you will end up owning something that could go down much more than you thought, but that has very limited upside. You can make much more money buying a Neiman Marcus (NMGA), which is doing well and can still get a bid, than you can buying, say, a Rite Aid (RAD), which is doing poorly and is unlikely to get a bid. Any time I deviate from this rule I get burned, particularly when I approach a stock as a nontakeover story and then the fundamentals go awry and I try to shoehorn it into a takeover story. Take Nortel (NT). After the accounting fiasco, I consoled myself that perhaps the company would be acquired because it was so cheap. That proved to be a sucker's game, because the company simply couldn't put out financials. Maybe one day Nortel will get a bid, but I have a feeling that it won't happen soon enough to make up for the time value of money. Some people stay in stocks like Sun Microsystems (SUNW), Novell (NOVL) and Gateway (GTW), always thinking that lightning could strike. Meanwhile, if they had moved on, they could have bought high-quality companies that moved up over time and could have done much better. Where are the fundamentals cheap and the takeovers likely right now? I have to tell you that I would think that the oil and gas plays with the big reserves -- both Canadian and American -- are the place to be. No company is too big to be acquired in the patch with ExxonMobil (XOM) walking around with $28 billion in the bank. I own EnCana (ECA) for my
|1.||Pigs Get Slaughtered||2.||It's OK to Pay the Taxes|
|3.||Don't Buy All at Once||4.||Buy Damaged Stocks|
|5.||Diversify to Control Risk||6.||Do Your Homework|
|7.||Don't Panic||8.||Buy Best-of-Breed|
|9.||Defend Some Stocks||10.||Don't Bet on Bad Stocks|
|Check back for more of Cramer's Rules|
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