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The New York Stock Exchange

Job Cuts Have Not Helped Companies’ Stock Prices

February 02, 2009 09:00 AM
by Anne Szustek
Layoffs are often the go-to for corporations looking to shore up their share prices. But in this recession, that has not been the case. What can companies do to keep their stock prices high?

Amazon, Netflix Doing Superbly; Not so for Firms With High Mergers and Layoffs

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Machinery company Caterpillar, owned by Dow Chemical, said on Jan. 26 that it was laying off 20,000 employees. Over the course of the week, its price per share went down about 10 percent. The same day, pharmaceuticals company Pfizer declared it was buying Wyeth and cutting 19,500 positions. Its stock went down about 9 percent over the course of the week.

Generally layoffs and mergers are a signal to potential shareholders that a company is getting its balance sheets in order. But in this current economy, they appear to be just another harbinger of doom weighing on the minds of investors.

“What we’re seeing is the overall market keeps getting pounded and pounded by bad news,” Investors Daily Edge market analyst Rick Pendergraft told CNBC. “Individuals haven’t reached the point where they’ve become numb to that information.”

Meanwhile, Web-based retail sites Amazon and Netflix have been faring well. During the last three months of 2008, ending Dec. 31, Amazon raked in $225 million in profits, or $0.52 per share, compared to $207 million, or $0.48 a year earlier. The e-retailer’s sales also beat projections: rising 29 percent over 2008 to $19.17 billion. On Friday, Amazon shares were up by around 18 percent as of 4 p.m. EDT.

Online DVD rental service Netflix’s stock has also made a strong showing so far this year on the back of strong fourth-quarter 2008 results and a positive outlook for the first three months of this year, thanks largely to its recent successful foray into downloadable content, in addition to its traditional service by mail.

“Netflix is a good company that treats its customer well,” Stifel Nicolaus analyst Scott Devitt is quoted as saying in a Seeking Alpha article. “Netflix is also well-managed and has been positioned well for an eventual transition to digital,” but continues on to say that the stock may be a bit overpriced at the moment.

In effect, the answer as to why these two stocks are faring well is apparent: they have emerged, at least for the time being, as recession-proof. In the meantime, what do investors see for the stock market as a whole in 2009?

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Opinion & Analysis: Recession recovery

Delta Global Investors chief economist Michael Pento told CNBC, “You have to question how the individual company you’re thinking about investing in will remain viable or prosper in this environment. As far as I’m concerned, the recession has all of 2009 to run its course.”

David Resler, the chief economist at Nomura Securities in New York, said the economy will have to see increases in consumer spending as well as from foreign investment. But companies are bracing for even further financial distress.

“Recent market activity suggests that investors are already factoring in poor economic performance for the next few quarters,” writes The Wall Street Journal’s MarketBeat blog. The share price of Black and Decker stock, which dipped to a 52-week low price on Thursday, “reflects a price-to-earnings ratio of 18 (using an estimate of $1.80 per-share earnings for 2009), matching the trough from previous cycles, according to analysts at Credit Suisse.”

The blog goes on to write that such projections may not hold in this economic climate, the worst the United States has seen since the Great Depression.

Also in regards to economic projections, The Motley Fool’s TMFEEldrehad’s CAPS Blog points out that if investors share “the same predictions or assessments as everyone else, these predictions won’t matter much,” given that would have already been taken into account in the outlook for the price of a given stock.

Reference: Investing guide

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