What the Recent Layoffs Mean for Stock Performance
Editor’s Note: In light of the recent layoffs in the tech sector, we have some important information we think you’ll find useful.
Our friend Andy Snyder details below how the latest downsizing at companies like Meta and Twitter will affect the stock market and how you should adjust your trading strategy going forward.
He’s also showing investors a brand-new asset class to invest in. And in today’s rough markets, this unique investment class could be a helpful way to survive and even thrive.
– Ryan Fitzwater, Associate Publisher
The headlines aren’t great these days. The economy is slowing (if not shrinking), sales are down and companies are laying off their workers at a quick clip.
We’ve seen some big moves this month. Cutbacks at just a few companies put tens of thousands of Americans out of work.
Layoffs are not done out of malice, of course. Companies are merely trying to remain companies. They need to pay off debt, stay profitable and reward shareholders. If overheads are too high, they must cut.
But what does it mean for investors… especially investors looking for a chance to buy low and sell high?
Do layoffs signal big stock gains? Or are they a predictor of more trouble ahead?
History tells the tale…
Layoffs come with some clear numbers and some not-so-clear numbers.
It’s easy to calculate the savings from pushing folks out the door. Companies save on salaries, bonuses, benefits and office space. Cutting 11,000 workers, like Meta Platforms (META) did this month, saves huge amounts of money.
Meta’s move could save the company a billion dollars or more.
Of course, the savings won’t come immediately. Severance costs are high. But they are typically constrained to a single quarter. Managing a slew of shuffling, though, can have effects that last for months. And the biggest consideration with layoffs is that there’s incredible opportunity cost at stake.
Cutting 11,000 members of its team means Meta will have to make some serious cuts to its product lineup and development. What multibillion-dollar project won’t hit the market next year because of these cuts?
Shareholders must rely on executives to weigh the long-term effects against the near-term savings.
Meta, for example, has ample cash flow and minimal debt. So we know its move wasn’t due to a cash crunch. It’s likely not sacrificing tomorrow just to pay its bills today.
Most likely, it’s making the move in a nod to shareholders.
Remember, the company had a trillion-dollar valuation late last year. Today, the figure is close to $250 billion.
It’s a huge hit.
Surely Meta’s move is aimed at boosting profits and bringing its share price higher.
Crunching the Numbers
Reading through the academic literature, we can clearly see the idea come to life. A study published by the Journal of Applied Business Research shows that there are two main variables in layoff economics…
The first, of course, is the impact the move will have on the bottom line. What will a company save? What will the layoffs cost – immediately and in terms of the future top line?
The second variable is a bit more potent. It hinges on how much the market anticipated the news and what the news signals about the company’s underlying finances.
If layoffs are a big surprise and signal a cash crunch, you can bet share price will suffer.
If layoffs have been signaled well in advance and the company makes it clear that its focus is on reining in unnecessary costs, the stock will likely rise.
The study had some interesting results. First, it showed the market’s initial reaction to news of layoffs tends to stick around. Second, it showed the higher the number of people laid off and the smaller the company, the greater effect the cuts had on share price.
So if a small company saw its shares dip after news of large cuts, its stock was likely to trend lower for longer.
A large company in the same situation would see a smaller drop.
But if a small company saw its stock pop after cuts, its share price was likely to continue to rise… and the larger the cuts, the higher the price went.
A Recipe for Strong Gains
Intel (INTC), for example, has been in the news lately. It’s been telegraphing a large round of layoffs for nearly a month. There’s no exact word on the figure yet, but leaders have said the company intends to save some $3 billion next year.
It’s likely to reduce headcount by more than 10%.
It’s a big company making big news, and its layoffs will come as no surprise.
That’s a recipe for a strong gain.
History proves the idea. The last time Intel made cuts of this size was in April 2016, when it pushed over 12,000 folks (11% of its workforce) out the door.
As the academics tell us to expect, shareholders were rewarded nicely. The chart below shows that shares rose quickly and nearly doubled over the next two years as the company regained its footing.
It’s good news for investors looking for a bargain.
By searching for companies that are restructuring or dramatically cutting costs, we can avoid a lot of the speculation around growth and earnings potential.
History tells us that big moves that are well telegraphed tend to treat investors nicely. And the smaller the company making the moves… the better.
It’s a solid tactic in volatile times.
YOUR ACTION PLAN
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