Don't Bet the Farm on a Takeover

Sure, you may miss some winners, but this strategy keeps you off the losers list.
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Can you believe how many of these little medical companies keep blowing up? Hardly a day goes by when one doesn't hit the skids. They dominate the new-low list and the biggest-percentage-decliners list. People drop coverage of them and get spooked by them. All the while, they keep looking cheaper and cheaper and cheaper. To no avail.

On Thursday I took a bath in one:

Humana

(HUM) - Get Report

. I felt like that woman in the bathtub in

The Shining

when I was through with it. I got in because it looked cheap. Heck, don't they all in this group. I figured the HMOs are getting some pricing, and Humana might just make the quarter and then some. Meanwhile, it could get a takeover bid, as it did try to sell itself once before and I am of the opinion that once a seller, always a seller.

So then why did I boot it? First, this

Medicare

payments stuff scares me. The government is just not the same old government.

Congress

is in no mood to pamper the HMOs and I think that pricing is going to get tougher. Also, Humana had a difficult contract negotiation with

Columbia

(COL)

hospitals in Florida, and I didn't want to be in to see what the results are. Looks like I was not alone. The stock was down heavily Thursday when Humana announced that it had a deal with Columbia but would not disclose the terms. In this market that's the kiss of death, as the worst was immediately assumed.

So why not hold on for a takeover? Because I never own a stock with deteriorating fundamentals with the hopes of getting a takeover bid. It is too likely that in the interim I will lose money or that management itself will be unable to sell at a good price because business is bad.

Sure, I will miss some takeovers because of this rule. But, more important, I will stay off the new-low and biggest-percentage-decliner lists. Takeovers are gravy; you can skip them. But those losers take away your meat and potatoes. I'm not going to lose those for a phantom bid.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.