Any good Canadian knows what happens when you toss a snowball downhill: that little ball of snow picks up more snow as it rolls, getting bigger, faster and stronger. By the time it crashes into a tree (or a tobogganer!), your little snowball might have grown ten times its original size. Public companies know this feeling all too well. A story that hits the news in the morning might seem like 'no big thing', but by the end of the day a CEO could be taking calls from the Prime Minister. Meanwhile, a company's share price and market value will reflect all the rumours, speculations and announcements that occur — for better or for worse. Let's look at a few examples…
Leave it to Hollywood to be the exception! Last month, Disney's science fiction flop, John Carter, lost $200 million. The executive in charge of approving the film, Disney Studios Chairman Rich Ross, was sent packing. Analysts call it the biggest-ever loss on a single film. Yet the fiasco has not hurt Disney's market valuation one bit. The day Mr. Ross was fired, the share price wobbled by about 1% and rebounded quickly. Most analysts continue to give Disney a 'buy', believing the company is well funded and has sufficiently diverse operations to handle the blow. Now that's what we call a Hollywood ending! [More: Bulls, bears, tortoises and hares: Take the 10-year challenge — Warren Buffett style!]
The night of Friday the 13th of January of this year was certainly unlucky for the world's largest cruise ship operator. One of its ships, the Costa Concordia, sank off the coast of Italy with over 4200 passengers and crew aboard. Over the weekend, the situation for Carnival worsened as it was discovered that the ship's captain was one of the first to head for shore. By the time the markets opened on Monday, investors sunk Carnival's stock by 20%, wiping out more than $1.5 billion of the company's value.
If a company's share price suddenly goes through the roof, it is often due to rumours that the company is about to be bought out. A takeover means shareholders will be paid a premium for their shares, making more people want to quickly become shareholders before the deal is announced. This was the case for Illumina, a young San Diego-based biotech company specializing in gene sequencing. When word got out last December that the Swiss pharmaceutical giant Roche (SWX:RO.SW - News) was interested in buying Illumina, the little company's shares surged by 46%. [More: The Wild West of investing: The biggest financial market you've never heard of]
One of the most valuable companies in the world has certainly had its share of stock swings. In 2008, a rumour that then-CEO Steve Jobs had suffered a heart attack caused a sudden 9.5% fall in Apple's share price. A year later, when Jobs announced a leave of absence (for real) due to his health, the stock price fell 7% and remained depressed for several weeks. Yet when Jobs passed away in 2011, the share price merely wobbled for a day and in the end remained fairly stable. Investors, like Jobs, knew the company would be in good hands with new CEO, Tim Cook.
One night in 2009, a man had a fight with his wife, had too much to drink and smashed his sports car into a tree. Awful as that was, the story would not have made global headlines except for the fact that the man's name was Tiger Woods. His wife (and the rest of the world) painfully learned that the once-revered golfer had a string of mistresses. Headlights, hearts and marriage vows were broken...but that was not the only damage. As the shares of Tiger's biggest sponsors fell — Nike, AT&T and Gatorade — it was estimated that investors lost up to $12 billion. [More: Buying stocks: Is it time to get greedy? Contrarian investing explained]
It must have seemed like a good idea at the time, but CEO Reed Hastings quickly came to regret his decision to split his company's DVD rental business and its video streaming business into two entities. After he announced his plan in July 2011, 800,000 Netflix subscribers cancelled over the threat of having to sign-up for two different systems. The share price fell from nearly $300 down to $75 in three months. The CEO humbly retracted and apologized. Netflix members, having successfully made their point, calmly returned to watching movies.
There was a time when Mark Hurd was hailed as one of the best CEOs in North America. For five years he ran HP with a steady hand, reducing expenses and stabilizing the company. Then came the day when it was discovered that Hurd's personal affairs were somewhat less laudatory. He was charged with sexual harassment of a pretty marketing colleague. Then it was discovered that he allegedly used company funds to woo the woman over dinner and drinks. Hurd settled the claim and was fired. The share price continued to fall for several weeks — losing 18% of its value.
The head designer of Christian Dior, John Galliano, was always known as a bit of a bad boy, but his antics took a serious turn last summer. On a drunken night out in Paris, Galliano was spotted yelling racist remarks at patrons of a sidewalk cafe. He was suspended from his job for four days, but word of his behaviour quickly spread and allegations of other comments came out of the woodwork. Actress Natalie Portman was one of the first to condemn Galliano's behaviour and it wasn't long before the designer was fired. Shares of Christian Dior slid, but the company later reported annual revenues were up by 18.7% - proving just how fickle fashion really is. [More: Baby buys it back: How share repurchase plans work]
Keep your eye on the (snow)ball
These days, with social media outlets such as Twitter and Facebook, the snowball effect can happen faster than ever. Stories, rumours and public relations issues grow exponentially — over the course of a week, a day, or even a few hours. If the news comes as a surprise, the company's share price will usually reflect investors' approval or disapproval in the matter. But if the price doesn't move much, it's probably because investors saw it coming. In other words, it pays to keep your eye on the (snow)ball.
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