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You Shouldn’t Buy Shares Based On This Reason

wrong way sign

Shares of Pan-Asia online hotel and travel agency Asiatravel.com Holdings (SGX: 5AM) have been quite volatile this month. The company’s share price had surged almost 9% from the end of May to 4 June 2014, and between 17 and 19 June, it rose a further 9%.

All told, Asiatravel.com’s shares have gained some 12.5% to its current price of S$0.36 from its close at the end of May. What had caused the company’s share price to balloon so much?

On 4 June 2014, The Business Times (BT) ran an article titled “Top Chinese firms eyeing Asiatravel.com”. The news piece was about how two Chinese firms may be vying for Asiatravel.com to “tap the booming e-ticketing travel space in China”.

The increase in its share price and the article in BT caused Asiatravel.com to issue an announcement. The company cautioned, “…there is no certainty nor assurance as at the date of this announcement that any of these discussions will materialise into any agreement, much less the completion of any material transaction”.

Following that, on 19 June, another news report by BT titled “Asiatravel jumps as talk of Alibaba interest returns” made its rounds. The article mentioned that “China-based e-commerce giant Alibaba could be poised for a stake in the company”. This promoted Asiatravel.com to issue another cautionary statement similar to the one released earlier. On a side note, Alibaba had recently bought a 10% stake in postal and logistics outfit Singapore Post (SGX: S08).

In any case, the share price of Asiatravel.com had risen purely due to speculation on having new investors or on being taken over. Shares of the company had not moved due to what’s really important – an improvement in business fundamentals. In fact, the travel firm had been making losses for three consecutive years; in 2013, it bled S$5.7 million while in the previous year, it made a smaller loss of S$3.8 million.

Examples are abound whereby share prices of companies have risen due to speculative news and reports. Travelling back in time to July 2013, Old Chang Kee (SGX: 5ML) was also in the thick of the action. The share price of the food & beverage outfit had jumped on news that it might be acquired. However, the party was short-lived when around a month later, it was made public that no transaction will occur.

Foolish Takeaway

The lesson we can take away from the Old Chang Kee episode is that we should always focus on the fundamentals of a share’s business and not purchase a share just because it may or may not be acquired by another company.

Shares represent part-ownership in a business and we should always approach investing from this viewpoint. Buying on rumours and selling on news will only help to fatten up the pockets of others, not yours.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.