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Whispers in the share market

by wise-owl.com

Wednesday 13th June 2007

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The Australian stock market has been swept up in Merger and Acquisition Activity for some time, but has rarely been as hot as now with rumours surrounding the world’s biggest miners, Rio Tinto (RIO) and BHP Billiton (BHP). The rumour has it that Rio is the take over target, with either BHP or possibly a private equity group being the suitor.

As the speculation engulfed the market, Rio’s share price soared, almost reaching $100 after trading between $80 and $85 for most of April. Nothing like a bit of speculation to drive a stock price!

Is it possible to profit from these rumours? Wise-owl.com analyst Tim Morris says “It is always amazing to see the speed in which these rumours spread around the market. By the time the average retail investor has time to act, most of the big moves have already happened. Of course, there is still time to invest in a stock like RIO and profit in case there is some truth to the story, but each investor will have to take into account their own risk profile.”

Rumours such as these are not uncommon. Not too long ago rumours surrounded the company Toll Holdings being a suitor of Patrick. The share price of Patrick quickly moved 30% due to speculators. These rumours came true and Toll Holdings acquired Patrick for $8.90/share. This also happened to Coles Myer just a few months ago and these are just a few of many examples. In today’s market management of lagging companies need to watch their backs.

Although, Rio Tinto does not fall into this category and along with BHP has been a ‘favourite son’ of many analysts for the past few years. However despite record earnings growth and the numerous ‘buy’ recommendations from brokers across the market, there has been little progress in these companies share prices compared to the broader market until recently.

According to wise-owl.com analyst Tim Morris “the market’s current appetite for corporate activity often comes at the expense of fundamentals such as earnings growth, a trend that is not sustainable over the longer term.” Therefore investors should beware of getting caught up in such hubris, and stick to basic principals such as earnings so that when the tide turns there is something to fall back on.


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About wise-owl.com
Wise-owl.com is one of Australia's leading independent stockmarket research houses. We empower all levels of investors and traders with education, advice, actionable strategies and risk management techniques. Our investment philosophy is based on a combination of quantitative, fundamental and technical analysis that has been proven over the years to produce very consistent and powerful returns. At wise-owl.com, we give our members knowledge, confidence and peace of mind.

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