Why this FTSE 250 stock surging 16% is bad news for my portfolio

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The FTSE 100 and the FTSE 250 jumped on Wednesday (8 April) on positive news from the Middle East. But one name in particular stood out to me. 

Gamma Communications (LSE:GAMA) surged 16.6% on the day. I own the stock, but the rising share price gives me a real problem. 

Takeover

In a lot of cases, stocks shot up because oil prices fell. That reduces the threat of inflation and lowers the chances of a recession.

This, however, isn’t why Gamma’s share price went up. It’s the result of the firm being the subject of takeover speculation. The company confirmed on Wednesday (8 April) that it’s in talks with potential bidders. And that has investors excited. 

There’s no guarantee anyone will be interested in buying for the firm. But if they do, they’re likely to pay above the current market value. On the face of it, that’s a good thing for Gamma shareholders. But I’m an investor and I’m not pleased about the news. 

Share prices

Despite the recent jump, Gamma shares are still down 29% in the last year. And the stock’s still below the price I bought it at. That gives me an issue. I had been planning on adding to my investment, but that isn’t so attractive with the share price 16% higher. 

I still think it’s undervalued. But if no offer for the company materialises, the stock could fall straight back to where it was before the jump.

The alternative, however, might be worse. If a bid does appear below the price I bought at, I might end up having to sell at a loss.  Obviously, that would be a big disappointment. Not least, because I still think the business is in a really interesting position right now.

Cloud communications

Gamma’s a business-to-business cloud communications provider. In short, it makes company phones work through the internet. 

At the end of the year, the UK’s set to switch off its copper phone network, and a lot of firms haven’t prepared. Those companies will need help. Gamma’s a natural choice for a lot of them to turn to. But it has some big competitors – and they don’t come much bigger than Microsoft. 

The firm can’t match Microsoft’s scale, but it has some unique advantages. These come from owning the telecoms infrastructure. This means the FTSE 250 firm can fix customer issues directly, which Microsoft can’t. And in mission-critical infrastructure, that’s hugely valuable.

What to do?

I like Gamma Communications as a business and the stock still looks cheap to me. But the situation has become tricky. 

Takeover talk’s put the share price in a strange sort of no-mans land. A lot depends on what happens next in terms of offers. This isn’t just a short-term issue. If the company’s sold, the outcome’s permanent.

My hope is that no deal appears. That’s likely to mean the stock goes down – but at least that way I can get back to buying it.

The post Why this FTSE 250 stock surging 16% is bad news for my portfolio appeared first on The Motley Fool UK.

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Stephen Wright has positions in Gamma Communications Plc and Microsoft. The Motley Fool UK has recommended Gamma Communications Plc and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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