Friday, March 22, 2013

How companies and stock prices respond to bad news.

Bad news can and usually does cause investors to overreact and sell stocks that may still be fundamentally solid, which is fine for the newer investors who now have an opportunity to grab a potentially undervalued stock. However, this bounce back may not happen at all if the business subject to the bad news handles it poorly. 

The two most recent examples of stock price falling because of bad news made worse are Lululemon (LULU) and Electronic Arts (EA). Lululemon began a recall of their too-shear Luon yoga pants, but with corporate changing it’s earning predictions for the year ahead and angry customers reporting poor service on the retail side there is much confidence in Lululemon lost. 

Meanwhile, EA has had many troubles with it’s recent release of their game SimCity, with players unable to connect to their mandatory service and then trying to justify the server problems due to technical issues customers later discovered didn’t exist. Add to that EA’s CEO resigning and you see investors running from the stock in droves.