Not all good news is created equal. Sometimes, what seems like good news is just a candy coating around something that is actually much more bitter. The trick is to spot the real reasons to rejoice from the news that serves little purpose but to add some froth to a slow news day. (Wanna get started investing? Check out our Investopedia Stock Simulator and hone your skills risk free!)
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"Today, we at XYZ Corporation are pleased to announce record earnings for the second quarter!"
Notice that corporate announcements of "record earnings" almost never put them into context. If the prior record was achieved ten years ago, how much should long-suffering shareholders celebrate? Likewise, if the company's ROIC is in the low single digits, there would not seem to be any immediate cause for dancing in the streets because better management could do more with those same assets. Companies also do not generally talk about what sorts of maneuvers go into their calculations, and there is no shortage of tricks, gimmicks and shortcuts that motivated managers can use to goose the numbers a little higher (often at the expense of future results). (For more, check out 5 Tricks Companies Use During Earnings Season.)
The topic of good and bad acquisition activity is broad and fertile field, but it is not always good news. Shareholders in the acquiring company have to first worry about whether the company is overpaying for the new asset, and the extent to which the integration of the new business will disrupt current operations.
Moreover, it is fair to ask why a company must take shareholder assets and give them to somebody else (almost always with a premium) to make the existing business better. Surely there are companies that have done well in the build-by-buying game (names like Danaher (NYSE:DHR) and Apache (NYSE:APA) spring to mind), but shareholders should not feel too comfortable with a management team that cannot grow without paying a premium for somebody else's assets.
On the flip side, is selling always good news? If you own the stock of a small company that you believe can be the next Amgen (Nasdaq:AMGN) or Apple (Nasdaq:AAPL), it is likely that any bid (particularly an all-cash bid) is going to short-change that future potential. More than once I have grudgingly tendered my shares in a buyout that gave me a nice short-term gain, but certainly less than I believed I could have earned over the course of years of successful growth and development.
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There has been a long-standing debate between the merits of companies returning cash to shareholders in the form of share buybacks or dividends. That is a debate for another time, but there is no doubt that share buybacks garner a lot of attention. It is interesting to see the extent to which the response to an announcement of a plan to repurchase stock outweighs the actual execution of that plan. And this is the rub.
When a company announces a dividend, they pretty much have to pay it - or at the very least, it is obvious to everybody if they do not. Share buybacks, though, are done quietly (almost covertly) and shareholders generally have to rely upon management announcements and/or regulatory filings to see whether or not management is actually putting the money where their mouths were. (For more, check out 6 Bad Stock Buyback Scenarios.)
Record Low Rates
Low interest rates are good news for people currently shopping for debt, but they are not necessarily good news in general. If interest rates are low, it can mean one of two things (or both) - the Federal Reserve is keeping rates low or there is very weak demand for loans. Neither one of these situations is cause to celebrate. It is also true that rates can be low when a country is pursuing sound fiscal and monetary policy, but we are talking about the United States here, so that is not really applicable.
If the Federal Reserve is pressing down rates, investors ought to wonder why. After all, it is now generally accepted that the Fed's low-rate policies played a significant role in both the tech-stock bubble and the housing bubble. Moreover, easy money today usually has a cost tomorrow - costs that can come in the form of higher taxes and/or higher inflation.
As much as Fed Reserve interference can be a negative thing, so too can low rates tied to flagging loan demand. If businesses feel pessimistic about conditions and do not wish to expand, that is typically bad news for employment, wages and overall economic activity. In other words, low rates can correlate with poor economic conditions, and those conditions are seldom healthy for the stock market in general.
The Bottom Line
Those who run publicly-traded companies are not stupid; managers understand the importance of psychology and investor sentiment, and they have learned many techniques from the public relations field. Consequently, investors need to look through the headlines and into the heart of the matter. While everybody waits and hopes for truly good news, there is no shortage of bad news masquerading as good news out there in the market. (For more, check out Can Good News Be A Signal To Sell.)
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