Even the best companies experience terrible, horrible, no good, very bad days. It could be a privacy issue, environmental disaster, product issue, bacterial outbreak, or any number of other situations that wreaks havoc.
The fallout could include social media outrage, 24-hour news coverage, or thousands of customers swearing off a company for good. Recent incidents at Facebook, BP, and Chipotle also had another adverse outcome: a drop in stock price.
What should you do if a company in your portfolio suffers a crisis? Sell your shares and try to salvage your investment? Hold them until things die down? Or something else entirely, like buying even more shares of the same investment?
As it turns out, times of crisis aren’t necessarily a downer for your portfolio. But you may need to block out the headlines in order to determine the right move for your situation and risk tolerance.
Breaking news: It’s not good
There’s an old saying about no news being good news. That can sometimes ring true for companies and their stock performance.
Take Facebook, for example. The company experienced a meteoritic rise from Mark Zuckerberg’s Harvard dorm room to a must-use platform for advertisers and marketers around the world. Its initial public offering (IPO) in 2012 was $38 per share. By early 2018, the stock had risen to $185.
Then the Cambridge Analytica data scandal emerged late last year. Users questioned Facebook’s use of their data, and Wall Street went into a panic as shares fell to $149 within a month.
Chipotle was one of the first fast-casual chains to disrupt the food industry. The Mexican restaurant with a focus on fresh ingredients held its IPO in January 2006 for $22 a share. The company suffered a few sanitation-related setbacks (hepatitis and norovirus outbreaks in 2008) but was quickly embraced by customers and shareholders around the world. By October 2015, the stock price had ballooned to nearly $732.
You probably know what happened next: E. coli. Three months later, Chipotle’s stock dropped to $413.
In both of these instances, negative headlines contributed to a major drop in stock price. A common response, as any investor knows. But Wall Street also often overreacts. Although it’s impossible to go back in time, let’s try.
If you were a Facebook shareholder in March 2018, what would have you done? (After Googling “Cambridge Analytica,” that is.) On one hand, you might’ve had ethical reasons to sell — your privacy was breached. On the other hand, you may have continued to believe in Facebook’s solid business model. After all, it has more than 2 billion monthly active users, recently brought in $16.6 billion of quarterly ad revenue, and owns Instagram and WhatsApp.
FB and Zuck have continued to be muddled in some pretty hair-raising affairs (like being pulled in front of Congress). But if you had sold your Facebook stock, you would have missed out on some pretty hefty gains: Three months after the Cambridge Analytica incident, shares reached an all-time high of nearly $210.
As for Chipotle, it’s also back … now. But it certainly wasn’t a quick turnaround. There was corporate reshuffling, a reexamination of the company’s core values, and even more E. coli outbreaks.
If you kept your holdings of the stock after the 2015 E. coli incident, you might’ve viewed it as a long-term investment — in the chain’s popularity, the increasing number of fast-casual restaurants, and society’s shift to healthier eating. That’s because, by the end of 2018, the stock traded for as low as $385, roughly half its pre-E. coli value.
But if you held onto your investment, it’s possible your bet paid off big time. Chipotle experienced a renaissance in 2019 as its stock soared above $700 during the first few months of the year.
The cautionary tales
Not every company is fortunate enough to experience the relatively quick turnarounds (and hefty gains) of Facebook and Chipotle.
BP’s stock traded for as high as $60 a share before the Deepwater Horizon oil spill on April 20, 2010. The stock price dipped $10 in the first 13 days following the spill, reaching a low of $27.02 in late July 2010, as oil still gushed into the Gulf of Mexico.
If you were a BP shareholder in 2010, you would’ve needed to weigh the facts: BP was one of world’s biggest oil companies with a 100-year-old track record. But other types of energy were already being discussed as alternatives to oil.
If held, you might’ve lost money (depending on the initial price you paid for the stock). Nearly a decade later, BP hovers around $40 per share — still unable to reach its previous high as environmental concerns and a shift to renewable resources have impacted the oil industry as a whole.
Volkswagen experienced a similar situation in September 2015 when news of its Clean Air Act violations first surfaced. The stock plunged 50% (to $11.54 a share) and has since struggled to reach and maintain the $20 threshold. But while these violations made big headlines, Volkswagen wasn’t particularly a hot stock to begin with — its current price has been relatively steady for the past decade.
If you held during the crisis, you wouldn’t have lost much money. Volkswagen has recovered from the initial crisis — and avoided others — but may not appear to have the same long-term growth opportunities as Facebook or Chipotle.
Investigate the full story.
You were taught long ago not to judge a book by its cover. The same thinking should be applied to companies you’re invested in and the news they create. Even in moments of crisis, look beyond the headlines, closely examine the situation and don’t react emotionally or impetuously. Instead, consider:
- Why did the situation occur?
- What is the company doing in response?
- Could it happen again?
- Is the business model still intact?
- Do I still believe this company can generate returns for my portfolio?
- Does this company still align with my investing goals and philosophy?
It’s also important to remember that past performance doesn’t predict future results.
In other words, just because a company experienced great success before doesn’t mean it’ll reach those heights again. But by researching the answers to the questions above, reexamining quarterly reports and annual forecasts, and using tools provided by your brokerage, you’ll be able to decide whether you should sell, hold, or buy low when a company in your portfolio faces a crisis.
If you feel unsure of the company’s future and the stock continues to drop, it might be best to sell (even if you lose some of your initial investment). But if you’re confident the stock will rebound — or you’re using losses to offset gains elsewhere in your portfolio — you might consider holding onto your investment.
For those feeling especially bullish on the company’s future, you could even consider buying more shares at a lower price.
If you’re interested in starting to invest — or are looking for a new brokerage — you can open a Self-Directed Trading account with us for no set minimum and start investing today.
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