Subscriber question: How is the FTC investigation going to impact Google…

Subscriber question:

Wonder if the FTC investigation is going to impact operations at Google?  It certainly has hit the stock.

Let’s talk about that FTC impact and how it did impact the stock because there’s a important if ancient trading lesson in that action.

There’s an old saying on Wall Street that you should “Buy the rumor and sell the news”.  The idea being that you first hear a rumor about a pending catalyst for a particular stock, that’s the time to buy it.   Then, when the rumor is finally announced, that’s the day you sell it.

In other words, let’s say you read my analysis in which I’ve predicted that Nuance could be an M&A target for an Apple or a Microsoft.  I’ve got no inside sources telling me such a thing, but I’ve studied the company, the industry and have talked to people who buy and sell Nuance software and all that led me to conclude that the company would make a lot of sense as a possible target.   The stock was up quite a bit as the weeks and months went by and over time, I started reading the same kind of Nuance-as-a-target analysis in Wall Street analyst reports.

Mar 5, 2010 – Nuance Communications Inc. jumped 6.7 percent, the most in three months, to $15.87 on speculation it will be acquired. Nuance, which has boosted sales for at least four straight years, is an attractive target for an acquisition, said UBS AG analyst Brent Thill.

At some point, the “rumors” that Apple is going to acquire Nuance hit the news…and the headlines followed:

Nuance stock jumps on false news of sale to Apple – Boston.com

Shares of Nuance Communications Inc., a maker of. … Nuance stock jumps on false news of sale to Apple. November 24, 2010|Erin Ailworth, Globe Staff … an online video interview with Steve Wozniak, who cofounded Apple with Steve Jobs 34 years ago. … in the two-minute clip, posted last Thursday on a TVDeck blog. …

The stock had doubled by the time the mainstream media and blogosphere picked up on the Apple-for-Nuance concept and it was up huge again on the final “rumor becoming news” headline.    And it’s been sitting up here near in the high $20s, down just a bit from the highs it hits whenever the Nuance-as-a-target rumors become news headlines.   And the time to sell Nuance, at least according to my playbook and analysis, will be if and when such rumors become actual headlines and Nuance agrees to sell out to one of these bigger guys.

Now back to Google.   It’s the same but exactly opposite.  The FTC-to-open-anti-trust-case-against-Google rumor first started heating up a few months ago in the analyst reports when the stock was near annual-highs.   And then it started heating up in the headlines and blogosphere a few weeks ago and the stock was hit nearly every day for weeks as the rumors and headlines mingled.  I was, as you guys know, buying Google on the way down and got aggressive with my purchases using near-term call options just as the FTC-rumors-as-headlines hit a flurried peak, three trading days before the FTC finally turned the rumors into outright confirmed news.

Yes, as painful as it was and as long as it ended up taking, finally, the news that the FTC was indeed formally opening up an anti-trust case against Google hits and guess what the stock did?   It’s been nearly straight up since putting in the rumor-confirmed-as-news bottom:

So the lesson, to fully lay it out, is — when it’s a positive catalyst, you want to buy the rumor and sell the news.  And when it’s a negative catalyst, you want to sell the rumor and buy the news.

I’m sticking with Google, but as it gets up near $550 or so, I’m likely to trim some of my common stock in the name and hold onto the calls which are now nicely profitable and give me lots of upside exposure while capping my downside.   At least that’s the plan until the next rumors start, whatever they may be and whatever opportunity they may give us is yet to be determined.