Sell on the Rumor, Buy on the News
By
Anders Bylund
October 6, 2008
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One of the most exciting growth stocks in the last decade just showed us how much you can lose by sticking to old wives' tales about the stock market.
Let's backtrack a bit, though. Hansen Natural (Nasdaq: HANS) sure knows how to pick its friends. A brand-new 20-year distribution deal with Coca-Cola (NYSE: KO) and its chief bottler, Coca-Cola Enterprises (NYSE: CCE), puts Monster Energy drinks on store shelves in six Western European markets and strengthens the company's shipping infrastructure in Canada and the United States.
The two-year-old deals with Anheuser-Busch (NYSE: BUD) and PepsiCo (NYSE: PEP) are still in place, and you can pretty much assume that wherever you see a bottle of Bud or a can of brand-name cola today, Monster will soon follow. I'd be very surprised if Hansen were satisfied with a paltry six-nation contract in Europe, and Eastern Europe and Asia are still virgin territories for the biggest-selling energy drink in the U.S. This growth story still has a lot of high-octane fruit juice left in its tank.
Back to the market lesson at hand, though. This partnership with Coke and its mini-me has echoed around the rumor mill since mid-September. Hansen's share price got a massive 31% boost in two days on the back of this promising development. Now that we have the facts, there's an instant 10% price drop on the books.
If you bought this stock when you heard the rumors and sold today with the facts in hand, you'd actually be sitting at a loss over the past three weeks. Existing shareholders like yours truly rode these conflicting waves to a 20% gain instead, with a fair chance of making more in the coming weeks, months, and years.
It's a classic example of how trading stocks usually falls far behind the returns you get from investing in great companies. One is a gamble, the other a lifestyle. "Buy on the rumor, sell on the news" would work great if you knew the rumors and the news before the market at large did. But you have the same publicly available information as everyone else, including the big boys with billions of dollars to invest.
Feel free to buy some Hansen shares -- it's a well-managed business with large market opportunities and a hot product or two. Just don't do it according to the rules in the "Wall Street Farmer's Almanac."
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