Newsworthy Events

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Newsworthy Events

At times investors will hear about events that have them running for cover, and rightfully so. One such event is the announcement of a regulatory investigation by an organization such as the Securities and Exchange Commission or the Department of Justice. While such announcements by themselves by no means predict impending doom, who knows what nasty surprises may lurk for investors as regulators start turning over rocks? In recent history, plenty of investors have been burned badly by such investigations, including Enron, Tyco (TYC), and WorldCom in the early 2000s; scandals at Countrywide and other firms in the wake of the financial crisis; and a string of scandals at Chesapeake Energy.

Look out for lawsuits

Another item to be wary of is a significant lawsuit. Corporate litigation is almost everywhere you look (these days, it’s almost a normal part of doing business), and estimates of any significant legal damage are usually already priced into a stock. However, lawsuits often attract others, which could place very large uncertainties on a company’s performance.

Keep regulation in mind

Changes in regulation can also affect the value and future prospects of a company. For instance, in addition to facing thousands of lawsuits, cigarette makers have faced the threat of potential increased regulation of their cigarettes from the Food and Drug Administration. Depending on future actions by the government, the companies’ financial performance could collapse catastrophically.

Analyst upgrades/downgrades

In addition to providing estimates of what they think a company’s sales and earnings will be, Wall Street analysts also provide recommendations for stocks they cover, such as "Buy," "Hold," or "Sell." When an analyst changes his or her rating for a company’s stock, the stock price often moves in the direction of the change. Does this upgrade or downgrade affect the business prospects of the company? No, the opinion of one person does not alter the intrinsic value of the firm, which is determined by the company’s cash flows. But maybe the analyst made the change because he or she thought the company’s business prospects have deteriorated. Maybe that’s right, maybe not. Check it out, and decide for yourself.