Buy On The Rumor, Sell On The News

By Sham Gad | June 30, 2010 AAA

The investment adage "buy on the rumor, sell on the news" has been around for quite some time. While I'm not one for adages or various other investment quips, many individual investors would benefit from understanding and not falling victim to Mr. Market's inner workings.

IN PICTURES: Eight Ways To Survive A Market Downturn

It's Too Late
Another corollary to "buy on the rumor, sell on the news" is to avoid most stocks gracing the covers of magazines telling investors to buy them. It's not that such publications are picking bad stocks - quite the opposite. Many publications do a good job of picking good business trading at "low P/Es" or other quality measures. The problem is that by the time they make the headlines, most of the value has already been picked through by investors who saw the value well before it was presented to the masses. Don't succumb to emotion in equity purchases; headline or not, price determines value.

Today's Example
Several days ago, Verizon (NYSE: VZ) announced that its Verizon Wireless would start offering the iPhone in January 2011. Considering that Verizon Wireless is the largest wireless provider in the U.S., and that the Apple (Nasdaq: AAPL) iPhone is currently the most successful smart phone in the country, the news looks like it would have caused Verizon shares to shoot up. Last week, Apple sold approximately 1.7 million of its newest iPhone, well above analysts' most optimistic expectations.

I don't think anyone will deny that Verizon will benefit from being able to offer the most popular smart phone. But it should come as no surprise that Verizon would eventually be able to offer the iPhone to its subscribers. There have been rumors of that for well over a year. If anything, those rumors have likely already been factored into the share price. In fact, Apple may benefit more since it will now be selling its popular device to both AT&T (NYSE: T) and Verizon Wireless. Some estimates assume 10 million new iPhones will be sold to Verizon subscribers within the first year. While the announcement suggests January 2011 as the start date, some analysts feel it won't be until the middle of 2011 because the iPhone will need to be designed to meet Verizon's tech specifications. That's additional time for Google's (Nasdaq: GOOG) Android to pick up even more steam.

The biggest beneficiary that no one is really talking about could ultimately be Vodafone (NYSE: VOD), which owns 45% of Verizon Wireless. At the moment, Vodafone does not receive 45% of the cash flows from Verizon Wireless. Those cash flows are being used to pay debt to the parent, Verizon Communications. Those debt payments are expected to be fulfilled later this year, after which Vodafone should begin seeing the cash flows. And those cash flows should increase when Verizon Wireless sells the iPhone. (For more, see Spotting Cash Cows.)

Hold The Phone
No doubt the marriage of Verizon and the iPhone is big news. But before pulling the trigger on the participating companies, be sure to examine all the facts and potential outcomes.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

You May Also Like

Related Analysis
  1. Stock Analysis

    T-Mobile US Unveils Data Rollover Plan, Upgrades Network - Analyst Blog

  2. Stock Analysis

    Ericsson-Ethio Telecom to Boost 2G/3G Network in Ethiopia - Analyst Blog

  3. Stock Analysis

    Inogen (INGN) Reiterates 2014 Guidance, Initiates for 2015 - Analyst Blog

  4. Stock Analysis

    Lockheed Martin Secures $308M Foreign Military Sales Deal - Analyst Blog

  5. Stock Analysis

    L.B. Foster Runs Risks on Expense Worries, Scopes Exist - Analyst Blog

Trading Center