There are a lot of companies that the average American just doesn't like. Whether it's because they lied to customers, provide poor service, or paid their employees too much, there is one big question that looms: should you stay away from a stock simply because of a public disgust towards the company? In this article, I analyze the "Ten Most Hated Companies In America" and come to 4 conclusions that all investors should use when investing in a hated company.
The list of ten companies in America that I am using is from a January 13th article published on 24/7 Wall Street. The companies on the list are Goldman Sachs (GS), Bank of America (BAC), Best Buy (BBY), Sears (SHLD), American Airlines, AT&T (T), Nokia (NOK), Facebook (FB), Johnson & Johnson (JNJ) and Netflix (NFLX). Here are the main conclusions that I have drawn:
1. When banks are getting negative press, their stocks tend to have very bearish performance throughout the process. However, they tend to outperform once the focus is no longer on them. Since many large banks have similar practices and similar assets, one bank having out of whack performance (unless leverage is the issue) normally means it's an overreaction. However, since banks tend to have high Betas, market forces tend to affect much more than a rebound in stock price.
2. When it comes to poor customer service, companies that do not have tethers on their customers tend to have long term bearish performance. This can be seen with brick and mortar retailers like Best Buy and Sears and airlines like American Airlines. Companies with customers who are bound by contracts or networks tend to stay afloat when bad customer service is involved. For example, Facebook and AT&T have done well despite poor customer service ratings since Facebook subscribers do not want to endure the hassle of rebuilding their social network and AT&T customer are linked to long term contracts. Customer loyalty programs normally do not count as a "tether" because many competitors will match status (like airlines) or it is easy to start a customer loyalty program with a competitor.
3. Companies known for innovation (especially in the tech sector) tend to be overvalued when growth slows or lags, even when it is expected. Research in Motion and Nokia have both taken huge hits after they began to lose market share and Netflix took a quick 70 percent hit after losing 800,000 subscribers. Even solar companies took giant haircuts after solar energy began to disappoint. However, these companies do tend to have nice rebounds after their big drops and getting into these stocks before the rebound is just as important as getting out before the drop.
4. Negative singular events like product recalls and disasters like the Gulf Oil spill tend to not have long term negative implications. BP not being in the list of hated companies and having similar performance to its competitors over the past year shows how people tend to forgive and forget. In fact, BP's 2011 earnings were 55 percent higher than 2009 earnings and 21.5 percent higher than 2008 earnings, despite recording a loss in 2010 as a result of the spill.
Analysis of the "Ten Most Hated"
Goldman Sachs is an investment bank that is known as one of the more prestigious firms in the industry. Their claim to the top ten has come from a laundry list of controversies since 2005. This includes mortgage backed security scandal, the Massachusetts sub-prime mortgage scandal, the food bubble scandal, their partial treatment in the bailout of AIG, and the SEC's civil fraud lawsuit. This list was published before the Greg Smith op-ed letter which caused a significant one day drop in stock price. From analyzing stock price from scandal to scandal, it appears that investors tend to overreact initially and then the stock slowly recovers over time. Catching GS on the recovery and then selling it can lead to some nice short term gains. Right now, I believe that GS shares are valued right where they should be, after a 33 percent increase so far in 2011.
Bank of America is a most hated company mainly because of its massive size (2nd in total assets) and it is usually the first bank that comes to mind when thinking of a bank in the United States. Its financial problems last year and its infamous $5 debit card fee added fuel to the fire. In 2011, shares dropped by 58.3 percent, but faced a nice little recovery so far in 2012. The trend that I found is that the stock has very bearish activity whenever the media focuses on it, but when other issues are being observed, like in 2012 with focus shifting to a bull market and the tech sector, it can generate some pretty nice returns. Bank of America shares are up almost 65 percent this year from the bull market and a strong recovery while being out of the news. I believe there may be some bearish activity for BAC in the future, unless they put out some very impressive earnings.
Best Buy made promises to customers that their online orders would be delivered by Christmas and then did not tell customers that their orders would not be filled until December 23rd. Since then, the stock has been on a bear run and the resignation of CEO Brian Dunn will keep that going. I will continue to follow Best Buy as the bearish activity continues. Currently, I would suggest staying away from shares as the bullish activity may continue. However, if shares drop as low $17-$18, I believe that it will be time to buy, unless they begin shutting down stores.
Sears has given itself a reputation for bad customer service. Almost everyone has a Sears story. One time I tried to buy luggage that had an $80 price tag on it, and then they told me it was $200, but it was going on sale in 2 days for $80 so I could buy it now for $200 and then come back when it went on sale to get my $120 back. Sears Holdings seems interested in liquidating the company and turning it into more of a hedge fund. Shares have been bearish on the whole, but its liquidation announcements can cause large one day gains. I have always been bearish on Sears Holdings and I believe their department stores will be gone in a couple of years. Right now, bulls are speculating on the liquidation value. Shares are down over 25 percent in the last year, but are up over 85 percent since the start of 2012. That's way to volatile for my taste.
American Airlines has lost a lot of business because of its recent bankruptcy and its customer service, which ranks as the worst in the industry. It stock, which is now not listed, took an 80 percent drop on the day it announced its bankruptcy. It is a great example of how bad customer service can ruin a company's value. Alaska Air Group (ALK), which was rated first in customer service has a $2.76 billion market cap on about $4 billion in annual revenue while United Continental (UAL), which hovers in the middle in customer service, has only a $7 billion market cap on $33.7 billion in revenue. I expect American Airlines to make a recovery from their bankruptcy and become a listed company once again. However, if they cannot improve on their customer service in the next few years, expect them to be right back where they are now.
AT&T was dogged for its failed acquisition of T-Mobile and its low customer service ratings. However, it still continues to be profitable and the stock price has not suffered too much. It will be interesting to see if its poor customer service rating will hurt its subscriber base in the future as contracts expire and other telecoms struggle for market share. Currently, I am a bull on AT&T as they have a lot of cash that can be used to build the next generation of networks.
Nokia's shares are down over 50 percent in the last year after a big drop of over fifteen percent on April 11, 2012 due to a negative outlook. The company has been trying to work more with Windows Phone and has lost a lot of market share over the past couple of years. Research in Motion (RIMM) has a very similar stock performance. In general, electronics companies that lose market share tend to have very bearish activity even when the lost market share is expected years in advance. Right now, I'm very bearish on Nokia stock, but I believe shares will eventually make a nice recovery similar to what Research in Motion and First Solar shares did.
Facebook made the most hated list because of poor customer service and several broken promises with users, including the sharing of personal information and issues with privacy. With 800 million users, it will be difficult for any social networking site to take Facebook's throne. However, Myspace had over 100 million users and lost popularity. Since its low customer service rating, the company's value has skyrocketed as many believe that Facebook's IPO will value the company at over $100 billion. With their $1 billion acquisition of Instagram, the tech bubble 2.0 alarm has officially sounded. However, I'm starting to think that the bubble is far from bursting and everyone involved in the Facebook IPO will come out much richer.
Johnson & Johnson made the list because of a few recent recalls including the Depuy implants and a children's product recall, both in 2010. Because the company is very diversified, the stock price was not hit hard. I was surprised that British Petroleum (BP) or Halliburton (HAL) did not make the list for the Gulf Oil spill. I believe the recalls have been put in the past by now as Johnson & Johnson has taken measures to prevent future disaster from happening. It has returned to its status as a blue-chip portfolio stock.
Netflix made the list because of its failed move to split the company losing 800,000 subscribers. Although the company has regained its footing and is now going into original programming, the move showed the difficulties of innovative technology companies when it comes to making changes to stay alive. I believe there may have to be a management change soon as the company becomes bigger. However, their original programming may be their next step in becoming a $300 stock once again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.