On Monday June 5, 2006 shares in Movie Gallery (MOVI) skyrocketed 17.3% to close at $6.86/share. The Dothan, Alabama company is the operator of retail stores that rent and sell DVDs, videocassettes, and video games.

So what caused this rather ordinary company's stock to shoot up with such extraordinary momentum? As far as I can tell, the near 20% jump is due to nothing more than myopic investors trying to jump on the bandwagon of what they believe is the next news-making takeover.

However, one cannot seriously believe that a company's intrinsic value can actually increase by 26% in half a day (based on the highest price the stock traded at during Monday's session), especially in an industry that has seen a significant shift to online renting from contemporary renting via brick-and-mortar video stores. Add in the competition stemming from on-demand services provided by cable and satellite providers, and it seems more than logical to conclude that the industry has definitely seen its hey-day come and go.

The significant jump in MOVI's stock price was most likely fueled by investor speculation that the company is a takeover target of larger retailers such as Blockbuster Inc (BBI) or Amazon.com (AMZN).

However, both companies would not comment on the speculation and with MOVI representatives publicly stating that there are presently no takeover offers from any other firms, investors are left with little tangible takeover evidence to back up the market's bullishness for this stock.

This sentiment was bellied by several Wall Street analysts who also believe investors were speculating on something that was not going to happen. As Dennis McAlpine of McAlpine Associates commented, "People might think someone is buying them (Movie Gallery) but I don't think that's the case -- it's too early for that."

Speculation about the fate of Movie Gallery rose significantly on May 11th when the company, during its Q1 conference call, simply announced that they would be open to any type of deal with Blockbuster. Movie Gallery CEO Joe Malugen was quoted as saying that a merger "certainly makes a lot of sense." Since then however, no move has been made by Blockbuster or any other companies such as Amazon.com and NetFlix Inc (NFLX).

Although it appears that the current increase in the price of Movie Gallery is purely speculation on the part of investors, one can't entirely rule out the possibility of a takeover. With a market cap of only $206 million after the price increase, Movie Gallery would definitely be a relatively cheap takeover that could improve the bottom line of bigger retailers such as Blockbuster.

However with no news coming out, analysts knowing nothing, and the companies telling us nothing, any play on Movie Gallery is purely speculative and may turn out to be an unprofitable one. When it comes to investing, the best of the best know to limit their investments to tangible value, purchased at a good price, rather than buying into hype and price momentum.

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Tickers in this Article: MOVI, BBI, AMZN, NFLX

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