The AMD Buyout Rumor: Why It Had To Be Fake

| About: Advanced Micro (AMD)

It seems that every time shares of Advanced Micro Devices (NYSE:AMD) hit new multi-year lows, a new buyout rumor citing "anonymous sources" followed by a sharp, intra-day short-squeeze follows. This happened back in August, which led to shares of the company spiking up about 8% intra-day before almost immediately calming back down and continuing its downward spiral.

The same thing happened today; AMD moved from an intra-day low of $1.97 to hit $2.30 before closing up only 5.03% at $2.09 on rumors that AMD has hired JP Morgan (NYSE:JPM) to explore options. AMD denied the rumors within a few hours of the initial rumor. There's a simple reason why this was not likely to be true and this is a way to detect if such rumors are fake in the future.

Recent Insider Transactions Tell A Different Story

We see that there have been a number of insider transactions within the last couple of weeks. Lisa T. Su, Senior Vice President and General Manager of Global Business Units just a few days ago purchased 48,000 shares at an average price of $2.05. If AMD were exploring a sale, and this information were known privately before the public "knew", then this would likely be insider trading on non-public, material information.

Further, Director Craig Conway recently sold 5,000 shares at an average price of just over $2.05. Why would he do so if he were aware of any impending plans to put the company - or its patents - up for sale? Would he really continue to dump his shares knowing that this is a very real possibility? The likelihood of him being unaware of any potential need to put the company or its IP for sale is low, so it, once again, makes no sense.

The Street Agreed

The spike intra-day was very short-lived. After going up nearly 20%, the stock managed to fade quickly into the close, and in the after-hours session lost the remainder of the gains from the day. With the massive short-interest on the stock, I would suspect that the short sellers would be a lot more cautious about their positions (and continue to cover over a longer period of time) if they believed that this rumor was anything close to credible.

Conclusion: Be Careful

Don't buy near the top on these "rumors" - most of the time they are completely fake. If you happen to be in before the spike, consider selling into huge intra-day rallies like this, but don't chase a company with deteriorating fundamentals on the basis of what some news site heard from "anonymous" and "unconfirmed" sources about a buyout. In any case, while I believe a sale of X86 patents to Intel (NASDAQ:INTC) or graphics patents to Nvidia (NASDAQ:NVDA) may be likely in the case of near-bankruptcy conditions in the longer term, it is still far too early for the firm to cut away what little intellectual property it does have for cash.

Disclosure: I am long INTC, AMD, NVDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.