The Ballad of Samsung and the Exploding Note
If you’ve been living under a rock for the past three weeks, let me quickly clarify the title: no, Samsung is not making a James Bond movie that features an exploding top secret note–they’re just making phones (that may or may not have top secret information on them)–which might explode. Sure, that’s pretty crazy/dangerous/paranoia-inducing but, why does it matter to you? (unless you have a Galaxy Note 7, then HOLY COW, GO FIND THE NEAREST FIRE EXTINGUISHER).
Samsung, the world’s largest smartphone manufacturer (by market share), is in some pretty hot water (pun intended, as always) with the recent news that their latest smartphone, the Galaxy Note 7, has been exploding in vast quantities. Since the news broke, it’s seen over $25 billion of its market capitalization (the measure of their size, based on the amount of stock issued and its value) disappear and it’s once prestigious reputation tarnished almost overnight. The question that stands, however: Samsung is a great company that makes great technology, and sells a whole ton of it, so why is their stock price tanking?
There are many ways to look at a company from an investment standpoint, be it technical or fundamental, yet there is one factor, above all, that seems to paralyze even the most sturdy of empires: headline risk.
Headline risk is the possibility of a company’s stock price being affected by media coverage, both positive and negative; if you watch MSNBC, you know this first-hand from just one episode of Jim Cramer’s Mad Money. Burned into memory, for example, is an interview that Bill Ackman of Pershing Square Capital sat for about Herbalife (HLF), of which Ackman is a known short seller and fierce opponent. During the interview, Herbalife’s stock traded on 1673% greater volume than the previous day and fluctuated more than 1% in value during the course of the 2-3 minute aired segment (for the full interview and to see the chart for yourself, click here).
Now imagine, if you will, the effect of several weeks of drawn-out media coverage on exploding phones and critiques of recall procedures. On their own, the two events are enough to make investors weary and the company’s executives shake in their Ferragamo slippers, but together (along with an approximately $1 billion bill to complete the recall) are a big enough hit to lead Samsung to sell off stakes in four technology companies, at a tune of about $1.16 billion (which it claims is unrelated, but the timing is all too convenient…). So what does this mean for you as an investor? The lesson to take away from Samsung’s current struggles is that no matter how healthy a company is, or looks to be, there is no escaping the terrible effects of headline risk. The worst part is, unless you’re part of an insider trading circle, you’ll have a hard time predicting possible newsworthy events in the company’s near future.
However, on the other side of the coin is the ability to take advantage of bad press and buy shares of a company “on the cheap.” If you’ve seen the movie The Big Short, then you’re familiar with the story of Cornwall Capital, the group who famously bet against the credit and housing bubble (and the subsequent crash). Where Cornwall Capital got its start was in event-driven speculation on Capital One Financial (COF) during its investigation by the SEC. In 2002, Capital One was being investigated for fraud due to their subprime lending policies, and possible insider-trading by its then-CFO, David Willey, causing its stock price to fall 50% in two months. After doing their own research and coming to the conclusion that the case would likely turn in Capital One’s favor, Cornwall Capital bet against the negative press and raked-in a nearly 2000% return. By taking advantage of the headline risk of an otherwise healthy company, Cornwall Capital was able to pick up the shares for significantly less than they were actually worth. In the case of Samsung, as it trades at a significant discount to even their pre-Note 7 debut price, many investors are holding fast to their long-standing success in the consumer electronics industry, not to mention their widely used microprocessors (surprise, your iPhone is probably powered by a Samsung chip), waiting for the fiery public outrage to die down.
Yet, with the recall officially starting on September 21st, and the global investigations likely to continue for at least a few months, the worst may not be over for the Korean tech giant. So where does that leave you? Well, if you’re in the action (a.k.a.- holding Samsung’s stock), let’s hope that their PR fire extinguishers are at the ready and Samsung pulls a Tylenol-sized turnaround; but if you’re on the sidelines–congratulations! For Samsung, it’s a lesson in patience: if they had taken their time, instead of trying to capitalize on a lackluster iPhone, they might not be in this mess. That being said, everyone has something to learn from the Samsung-fiasco: buy companies based on their ability to survive in the face of headline risk. Put another way; don’t invest in a company that you don’t understand or have faith in. If you do, you may find yourself paying for it after a bad week in the media–without hope for a recovery. However, if you plan to use headlines to your advantage, you should keep an eye on the news and keep track of companies who tend to be a ‘favorite’ of the reporters; so long as it can handle the heat, you might find the next Capital One…
(…if you do, please email me. Please.)