The implications of news for investors
Beginner Stock Market Investing, Stock Market Investing Advice, Stock Market Investing Strategies
Not all news that appears to be good news is good for the investor and not all news that appears to be bad news is bad for the investor. With any news item, you will need to a certain amount of research and analysis to determine whether it is good or bad for you. Public relations experts have turned the process of putting a spin on news to such a high level that they can often make even relatively unfavorable news seem good. Shareholders are often impressed with the supposed quality of management even when the existing management has actually mismanaged the affairs of the company. Separating the substance from this hype is critical if you want to learn the true state of affairs and determine that all so-called good news is not always good for you.
As an example, let us take the case where a company announces a major restructuring. In these difficult economic times, restructuring and layoffs are an essential part of the ability of the company to survive and prosper as the economy rebounds. Judging by the way restructuring is welcomed by many institutional investors and analysts, you would think that it was undiluted good news. However you should take all this with a pinch of salt. Often restructuring can be a good idea especially when business is underperforming and the new management team takes over to rectify the underperformance.
How about an underperforming company with the same management team remains in place but the restructuring is announced? The same management that hired people is now firing the same people and, instead of fairly and squarely taking responsibility, find other scapegoats to carry the can. Restructuring can play hell with the company morale and completely erode the loyalty and bonds between employers and employees. What are worse, companies can sometimes cut muscle along with the fat and leave themselves more uncompetitive than before. If you hear the word restructuring, you should immediately investigate to find out whether the restructuring will have a positive long-term effect on the fortunes of the company or is merely an alibi to cover up bad management.
The other word of which you should be wary is the term recapitalization. There is an academic theory that is an ideal balance between equity and debt for each company but, sadly, these academics have never worked in industry or run a company. You will sometimes find that an otherwise sound company uses this theory to go out and raise large amounts of debt especially when interest rates are low. They find that the cost of servicing debt may be less than the cost of servicing equity letter in addition to the tax advantages of the tax-deductible interest payment (dividends are not tax-deductible). Having raised all this money which is now burning a hole in their pockets, company management is often tempted into unwise expenditure such as overpriced acquisitions. They forget that the debt has to be repaid and if you bet the farm on an unwise acquisition, the company can easily go under. Recapitalization has its merits but only if company management is wise enough to use the money properly.
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