Betting on a Buyout for FMC Stock? Why That Could Be a Risky Strategy

When a company announces that it's exploring a possible sale, it could result in a big gain for investors. If an acquiring company wants to buy the stock and pays a premium, investors may stand to make a strong profit. That can be particularly enticing for stocks that have been performing poorly, such as FMC (NYSE: FMC).

Shares of the agricultural sciences company have been crashing over the past year, with FMC's valuation being cut in half. Its financial results haven't been strong by any means, and plenty of question marks surround the business today. And yet, it's up 24% since the start of the year, as many investors may be hopeful that an acquisition will take place soon. But here's why betting on a deal may not be a great idea.

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There are up to 10 interested parties in the business

Earlier this year, FMC told investors it was considering strategic options, including a potential sale of the business. And according to reports, there are between five and 10 parties thus far that have shown interest. While that doesn't mean FMC will receive that many offers, it's an encouraging sign to investors that there are many potential acquirers that see value in FMC's business.

The hope for investors is that this might spark a bidding war, leading to a sizable increase in the stock's value and significant gains for those who have recently bought it. But there's no guarantee that a deal will go through, or that the valuation will be high enough for investors to turn a profit. There's also the possibility that nothing happens anytime soon, the excitement fades, the agriculture stock falls, and then a buyout does take place -- but at a much lower price tag, which could still be considered a premium based on where the stock was recently trading.

FMC is not much more than a speculative buy at this point

If you're considering buying FMC stock today, it's important to be aware of the significant risks involved. The company has incurred losses in three of its past four quarters, and it is exiting the Indian market due to challenging conditions. It also slashed its dividend by an incredible 86% last year, which sent the stock into a freefall.

This is a stock full of risk, and while an acquisition may seem likely, it's certainly not a guarantee, and there's no telling what price it might fetch even if it does happen. For the vast majority of investors, the best option is to simply avoid the stock for the foreseeable future.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.