Why More Downside Is on the Horizon for Great Canadian Gaming Stock

Speculative investing can be dangerous. Here’s why Canadian Gaming Corp.’s stock price could come under pressure in the short term.

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Shares of Great Canadian Gaming (TSX:GC) have shot higher in recent weeks due to an announced acquisition offer for the company. This acquisition implied a significant premium to the share price at the time. A $39-per-share offer was made when the share price was hovering around the $35 level. Since then, the company’s share price has risen as high as $45. This was due to anticipation the offer price could be raised.

Deal may not happen

This offer has since come under scrutiny. Accordingly, shares have dropped, as investors mulled over the idea that the deal could fall through. This has happened as a result of comments made by shareholders that an offer under $70 per share would not be accepted. If this is true, Great Canadian’s share price could see some significant short-term downside volatility.

Shareholders in Apollo Global Management, the private equity firm making the offer, have also pressured the acquirer to reconsider its offer. Two key shareholders have voiced publicly they are opposed to the deal, viewing it as overpriced. This is certainly not positive for investors bullish on the deal going through.

Acquisition negotiations tend to be difficult to predict. These events are inherently speculative. Investors need to assess the likelihood of these deals to be completed. Analysis of mergers and acquisitions is difficult, and even the best institutional investors get it wrong from time to time. As such, retail investors need to take all such announcements with a grain of salt.

Speculation is not a winning long-term strategy

Buying a stock on the basis of an acquisition offer can be a dangerous endeavour. Many an investor has been wooed by headlines to be rear-ended by reality when a deal falls through.

Indeed, this private equity offer is a signal that Great Canadian’s stock price could be undervalued. That said, this could also be an indication that private equity firms are overpaying for assets right now.

With asset prices across the board heading into inflated territory, such a scenario is not out of the question. In fact, investors should be questioning every valuation right now. When stocks demand significantly higher valuations than history dictates makes sense, deals can be announced that may be counterproductive, whether they take place or not.

Bottom line

Investors should proceed with caution right now with any investment in today’s environment. Headline investing ought to be avoided. Fundamental analysis on individual stocks is the best way to gauge the viability of any investment intended to be held over the long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any of the stocks mentioned.

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