Layoffs, Once a Boon to Stock Prices, Now a Burden

Friday, Nov 21, 2008  |  Updated 1:06 PM CDT
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Back when things made sense in the stock market, a company announcing layoffs would be greeted as a positive sign that it was getting its act together and shoring up its bottom line.

Not today, though, when job cuts, such as the 53,000 served up this week by Citigroup, are greeted as just another reason to think the sky is falling.

"Anytime where people aren't totally panic-stricken about everything and where the one-offs tend to be more company-specific ... historically many of those companies have rallied on the appearance that they are developing some fiscal responsibility," says Uri Landesman, head of global growth strategies at ING Investment Management. "In this case, however, it is being seen as a sign of deeper panic."

Where one might normally expect the Citi (NYSE: C) layoffs to generate some enthusiasm that the banking giant is cleaning up its balance sheet, investors are ditching the stock in droves. Citi shares have lost half their value this week alone as the company's market value fell below that of US Bancorp (NYSE: USB), which is one-eighth as large by assets.

But Citi has hardly been alone in terms of losing share price after announcing layoffs. A slew of other companies have experienced the same phenomenon, and the trend is likely to continue.

"For the foreseeable future, until the market stabilizes, you will see a similar reaction," Landesman says. "If CEOs are expecting their stocks to rally on layoffs, I don't think that will happen in the short term. Right now it's being seen as a sign of weakness rather than a sign of strength."

A few cases in point, and they're not limited to the financial sector:

  • JPMorgan Chase (NYSE: JPM) is cutting about 10 percent of its workforce, sources say, but its stock continues to tumble, down by 15 percent Thursday despite the cost-cutting.
  • Mattel (NYSE: MAT) is beginning layoffs of 2.9 percent of its global workforce this month, but its stock is off more than 17 percent this week alone.
  • Goldman Sachs (NYSE: GS) notified 3,200 employees this week that they will be jettisoned, yet the stunning decline of the company's stock continued with a 20 percent loss since Monday.
  • Dell (NASDAQ: DELL) is nearing the end of 9,000 job cuts but has seen share price tumble more than 25 percent over the past four weeks.
  • Xerox (NYSE: XRX) has cut 5 percent of its workforce, or 3,000 positions, and seen shares fall more than 35 percent in the past month.

The takeaway: Much of this new round of layoffs comes from companies with problems far too complicated to be solved simply by cutting personnel costs.

"What we're seeing is the overall market keeps getting pounded and pounded by bad news," says Rick Pendergraft, market analyst at Investors Daily Edge newsletter. "Individuals haven't reached the point where they've become numb to that information."

Worse than that, the job cuts have raised concerns over whether some of Wall Street's most familiar names can survive the current crisis.

"Even a year ago this (layoff news) might be more favorable received," says Owen Malcolm, senior vice president at Sanders Financial Management in Atlanta. "Now, a firm like Citi, hard as it is to believe (the market is wondering) if they're going to survive or survive in their current structure or format."

What Can Investors Do?

The sour mood has presented vexing challenges for investors.

Most pros now are getting as far away from risk as possible and looking to find only the most solid companies in the market. Landesman says ING is "very long" on both Wells Fargo and JPMorgan Chase, two banks that have somewhat weathered the credit crisis and could be good candidates to be among the last big banks standing once the smoke clears.

But even they've seen hard times, with Wells Fargo (NYSE: WFC) shares off more than 20 percent and JPMorgan's (NYSE: JPM) stock down more than 30 percent since Sept. 1.

"They have some of the same exposures but I just think they're in much better shape than Citi right now," Landesman says. "They're better capitalized, they've just been able to make very valuable acquisitions, which they basically got for a song and are going to be paying dividends."

Using a similar strategy, Pendergraft sees AT&T (NYSE: T) perched on solid ground, above the fray of the numerous weaknesses bedeviling the markets. And he reiterated an earlier advocacy of Chattem (NASDAQ: CHTT), maker of Gold Bond foot powder and other consumer health care products, as a company that is positioned to weather the storm.

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Others, though, are avoiding equities and focusing on corporate and municipal bonds.

Malcolm said he's been buying a variety of municipal bonds because of their safety appeal as well as attractive yields, but does not like the risk associated with many corporate bonds.

"The (corporate) yields are definitely attractive and competitive but we feel it's a much safer but still very attractive bet in the municipal bond market, where we still feel spreads are very attractive," he says. "Not to say that there still aren't problems with various markets,  but we still have confidence in the risk-reward formula."

The move towards safety is unsurprising considered the volatile nature of stocks, a condition that Citi and others have only exacerbated with the sharp layoffs.

"They appear to be using a hatchet rather than a scalpel," Pendergraft says. "If you see a company that's paring back a little bit because demand has fallen off, that's not a bad thing. That's kind of keeping up with the times. When you see 20 percent cuts, now you've got to question the viability of the business."

Until the dust clears with Citi, General Motors (NYSE: GM), Ford (NYSE: F) and other big companies under fire, advisers are telling their clients to keep their powder dry.

"They could strike a deal tonight or over the weekend that could alter the future course of Citigroup or GM or Ford. There's no way to predict that," Malcolm says. "As an investment adviser we're telling our clients to steer clear and resist the temptation to bottom-fish."

For more stories from CNBC, go to cnbc.com.

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