Things People Despise About Big Companies Make Them Great Investments

You may have clients who are losing faith in the stock market.  You might wonder why the market has shown strength despite nonstop negative news about the Coronavirus and the economy.  Often, the things the general public dislike about big business are what makes those big companies good investments.

1. Earnings mean everything.  Wall Street judges everything on earnings.  Stock prices are usually set by P/E multiples.  It’s like testing in school.  Success is measured by the scores you get.  When business slows down, companies will lay off people, close stores and cut dividends to help improve earnings, all in the desire to keep the company stock price strong.

2. Big bonuses for senior management.  Companies set goals and pay for results.  If your compensation is tied to your performance, you perform.  It’s like hiring a home contractor.  You want an agreed price and completion date.  If you pay for “time and materials” they can stretch out the job as long as like (while working on other jobs) and charge what they like.  There’s no incentive to get the job done quickly. 

3. Hoard cash.  Aren’t companies supposed to grow?  Aren’t they supposed to reward shareholders?  Then why do they sit on so much cash?  They want money in reserve to buy other companies.  They use the money for share buybacks when their stock is low, figuring the best investment around is their own firm.

4. Get a monopoly.  Aren’t monopolies illegal?  Companies try to be the dominant player in their industry or own proprietary technology.  This creates significant cost of entry for competitors, allowing them to keep prices, revenues and earnings high.

5. Pay as little in taxes as possible.  Why don’t companies that earn lots of money in the US pay their “fair share” of taxes?  Because the rules often allow companies to choose where they are headquartered.  Often, it’s a low tax jurisdiction.     They want to minimize taxes for shareholder benefit.

6. Ask for government help.  Big firms generally want to minimize regulation.  They want the government to stay out of their business.  The exception is when a catastrophe hits the economy and the survival of the company is at risk.  If a company goes under, shareholders are last in line.  Remember the Great Recession and “Too big to fail?”  That when they want a helping hand, with as few strings as possible.

7. Solve problems internally.  Big companies have their own auditing and compliance departments.  When a problem is discovered, the last things they want to do is “go public.”  Then they lose control.  They prefer to conduct internal investigations.  In everyday life, it’s comparable to “keeping it in the family” vs. Airing your dirty linen in public.

All these points make them easy targets for public anger.  They are also the strategies that make them successful, increase earnings and push stock prices higher.  Sometimes behavior that makes them look unattractive also make them great investments.  Unlike an “us” and “them” scenario, people can become part of “them” by buying shares and becoming partial owners of the company!

Related: Is Pandemic Prospecting Ethical?