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I've been looking to buy some stocks recently, and have been curious about something.

I'm looking to invest in some tech companies, and wondering why is it that when they announce layoffs, the stock price goes up? I was thinking about investing in AMD today, but it turns out that despite them reporting layoffs, their stock went up.

In this case, I've been thinking about investing in companies that are going to have massive layoffs soon. But I don't understand why laying off employees will drive stock prices up. Why is this? Am I confusing what's happening?

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    Layoffs reduce expenses and make the numbers look better in the short term. The stock price goes up in anticipation of those better numbers. It's not a good long term signal. – Guy Sirton Oct 17 '14 at 16:41
  • because bad news that effects some people isn't bad news to richer people. so all those "the factory shut down" sob stories no longer apply to you, its a good problem to have! – CQM Oct 19 '14 at 16:49
  • Most money is held by Republicans. – theDoctor Apr 23 '18 at 21:20
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If the market believes that the company is overstaffed, then management acknowledging the issue and resolving the problem can result in the price going up.

It can also mean that external events drove the price up, and the bad news was lost in the other issues of the day.

Sometimes layoffs are a sign of the company entering a long downward spiral; in other cases it is a sign of the beginning recovery. The layoffs can also be viewed as good news if they weren't as big as some experts feared.

You have to look at the exact situation to understand why news x impacts the companies price.

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    Got it, so I can't rely on just one event and invest in stock around that. Thanks for the help! – yuritsuki Oct 17 '14 at 16:16
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    "if they weren't as big as feared" -- an important point. It's wrong to assume that "good things" increase the price and "bad things" decrease it. Even if layoffs are a bad thing, actually "news that's worse than the market expected" decreases the price and "news that's better than the market expected" increases it. Simply because the price before the news already includes the market's best guess as to what the news will be. Furthermore any news, no matter how bad, has the potential to increase price in a market that dislikes uncertainty. – Steve Jessop Feb 16 '15 at 21:35
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As others have pointed out, there are often many factors that are contributing to a stock's movement other than the latest news. In particular, the overall market sentiment and price movement very often is the primary driver in any stock's change on a given day.

But in this case, I'd say your anecdotal observation is correct: All else equal, announcements of layoffs tend to drive stock prices upwards.

Here's why:

To the public, layoffs are almost always a sign that a company is willing to do whatever is needed to fix an already known and serious problem.

Mass layoffs are brutally hard decisions. Even at companies that go through cycles of them pretty regularly, they're still painful every time. There's a strong personal drain on the chain of executives that has to decide who loses their livelihood. And even if you think most execs don't care (and I think you'd be wrong) it's still incredibly distracting. The process takes many weeks, during which productivity plummets. And it's demoralizing to everyone when it happens.

So companies very rarely do it until they think they have to. By that point, they are likely struggling with some very publicly known problems - usually contracting (or negative) margins.

So, the market's view of the company at the time just before layoffs occur is almost always, "this company has problems, but is unable or unwilling to solve them.".

Layoffs signal that both of those possibilities are incorrect. They suggest that the company believes that layoffs will fix the problem, and that they're willing to make hard calls to do so.

And that's why they usually drive prices up.

  • I don't understand your last point. What do you mean by "public view of layoffs are "company has issues, will not resolve them", but then say "layoffs mean the previous statement can't be true." – yuritsuki Oct 19 '14 at 17:37
  • @thinlyveiledquestionmark thanks - I made an edit that (hopefully?) clarifies. See if that does it for you? – Jaydles Oct 19 '14 at 17:44
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    Okay I think I understand now. basically, the public's perception of an announced layoff is completely off, because layoffs actually indicate change in the company, rather than something bad that is happening. Is this right? – yuritsuki Oct 19 '14 at 21:30
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    @thinlyveiledquestionmark basically yes - the key is that when layoffs happen, the market's view before then is almost always "something is broken - I hope they are working on some way to fix it." The layoffs communicate "this will fix it". That may be right or wrong, but "they have a NEW plan" is more comforting than "they don't seem to be changing the things that got them into third mess." – Jaydles Oct 19 '14 at 21:34
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AMD is doing more than just laying off staff. Their earnings report also includes sales of real estate and other turn around strategies that could be reflected in the stock coming up on hope from investors. At the same time, consider how much of an up is a definite sign of positive news and how much may just be random noise as even a broken clock will be right twice a day.

Often there will be more than just an announcement of x% of staff being laid off. There will be plans to improve future profits and this is what shareholders would want to know. What is the management doing to move the company forward to better profits down the road.

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    So I should look at the whole picture instead of just one little detail. Awesome, thank you! – yuritsuki Oct 17 '14 at 16:16
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    A stock near its 52 week low, down 50% from where I bought it, isn't quite in recovery more for the sake of a 10 cent move. Until their underlying issues are addressed, this is simply a dead cat bounce. – JTP - Apologise to Monica Oct 17 '14 at 16:45

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