(By Street Authority) Earlier this week, I looked at a range of commodity stocks that look quite attractive in relation to the value of their assets.
I focused on Freeport McMoran (NYSE: FCX) as a clear example of a stock that looks quite appealing in the context of its balance sheet, if not its income statement.
Yet other investors are focusing on Freeport McMoran for an entirely different reason. A recent article on Bloomberg.comsuggested that a major mining firm such as Rio Tinto (NYSE: RIO) could take advantage of share-price weakness and make a move to acquire the copper and gold miner.
The article quickly reminded me of a lesson I learned from a mentor nearly 20 years ago: "Never ever pursue a stock simply on the basis of a buyout rumor." He correctly noted that few rumored deals actually come to pass.
Since then, I've added my own addendum to his dictum: If a stock is reasonably-priced or downright inexpensive -- even after buyout rumors have circulated -- then you could look at the potential deal as another catalyst for the stock.
In that context, Freeport McMoran is already quite attractive on its own merits, and a bid from Rio or BHP Billiton (NYSE: BHP) would just get you to your eventual target price that much more quickly. The fact that Freeport McMoran's stock has risen only modestly since the story ran only reinforces the notion that you are not chasing someone else's "pump-and-dump" scheme.
Of course, there are many examples where investors foolishly chase a stock ever higher on buyout rumors, only to get burned when those rumors die down. This happened recently with drugstore chain Rite-Aid (NYSE: RAD). Shares moved up from a $1 to $1.50 this past winter on improving results. To most analysts, $1.50 looked like fair value. So when the stock shot past $2 on buyout rumors, the stock suddenly became very risky.