My Company's Stock Price Is Down, Now What?
When your company’s stock price falls - as it likely has over the last year - the experience is downright painful. Making things worse, knowing what to do next with the stock can be exceedingly challenging. A significant portion of your net worth has declined, and questioning the investment decision is understandable. However, remember that market swings like we are seeing today, both up and down, are normal and expected. Furthermore, all companies go through cycles irrespective of what the stock market is doing. In this series, I’ll help you make sense of the drop and provide several different approaches for handling your concentrated stock during turbulent times. Over the next four installments, we’ll cover:
Assessing the situation
Pros and cons of holding
Hedging risk
Tax-efficient strategies
Now, let’s get started with assessing the situation. To avoid burying the lead, we’ll cover the following five techniques.
#1 – Review Your Company’s Financial Statements
This includes taking a look at the balance sheet, income statement, and cash flow statement to gain an understanding of how the business is operating, what the C-suite is choosing to invest in for your company, and where underperformance may be occurring. Comparing these figures to your competitors’ performance is especially useful since this dynamic will be a significant consideration for investors pricing your stock.
But how do we go about comparing your company to competitors? A helpful place to begin is by looking at basic financial ratios. Which ones are most valuable? That will depend on your company’s industry. For example, if you are in software development, cost of goods sold is usually far less meaningful than if you work as a clothing designer at Nike. While I cover industry-specific considerations with clients, that would certainly go beyond the scope of this blog post! With that in mind, below are five common examples often applicable across different industries:
Return on Equity (ROE): how efficiently a company is using its shareholder equity to generate profit.
Debt-to-Equity: the extent to which a company has borrowed to fund operations.
Quick Ratio: often called the ‘acid test,’ a company’s ability to pay short-term obligations using its most liquid assets (excluding inventory).
Earnings Per Share (EPS): used to measure profitability by dividing net income by the number of shares outstanding.
Price-to-Earnings (P/E): one method of determining how highly valued a stock may be, particularly in relation to its industry peers, by dividing share price by EPS.
#2 – Listen to the Earnings Calls
This may seem like a given, of course. However, one of the most illuminating aspects of the earnings call is not what your company’s CEO and CFO have to say in their prepared remarks. Rather, oftentimes the questions asked by third-party analysts who follow and publish opinions about your company can shed light on what the market is focused on when pricing your stock.
The label “earnings call” only tells half the story, however. During the call, leadership will provide their expectations on the company’s performance in the coming quarter. This update is commonly referred to as “forward guidance.” Since the stock market is forward-looking by nature, forward guidance can move the stock price just as much, if not more, than reporting performance over the last quarter. With these two factors in mind – information on the past and the future – it’s no wonder your stock price can get volatile around earnings announcements!
#3 – Identify the Reasons for a Price Drop
This will be an important aspect of formulating a perspective on whether you believe the stock price drop is temporary or long-term. Is this a proverbial baby-with-the-bathwater situation, or have the long-term growth prospects of your company been weakened? Several examples of causes for a price drop are:
Recession fears (as we’re seeing now)
Declining confidence in executive leadership (ex: the CEO)
Technological disruption (such as AI)
Emerging competitors or products (as Tesla is experiencing)
Trend shifts (like work-from-home)
Let’s look deeper at a specific example. Businesses that are highly dependent on access to low-cost debt are at a disadvantage in this higher interest rate environment and will find themselves climbing out of a more difficult hole than competitors with free cash flow on their income statement. Conversely, valuation multiples – simply what investors are willing to pay for businesses – have fallen virtually across the board since the start of 2022, and few companies have been spared regardless of their underlying competitive advantages or favorable qualities.
#4 – See What the Market Expects from Your Stock
While analysts don’t have a crystal ball (any more than you, I, or anyone else) about whether the stock price will go up or down from here, much can be gleaned about the opinions surrounding your stock. Many analyst price targets are publicly available. For example, NASDAQ gathers analyst views on a long list of companies. To illustrate, the report for Nike is available here. Simply find your company and start sleuthing.
Do analysts view your stock as a strong buy? A hold? A sell? Additionally, a range of target prices for the stock is provided. What is the current range for your stock, and how does that align with your expectations? And finally, if you’re interested in reading a more detailed opinion – often going beyond the numbers – a written report from research institutions, such as Morningstar, is often available via brokerage logins.
#5 – Calculate the Impact on Your Goals
The most important step, in my opinion, is to build a clear and realistic understanding of how a lower stock price affects your plans for the future. You may have earmarked, at least in your own mind, the value of your company stock for a particular purpose or goal. For instance, if a person with concentrated stock is seeking financial independence, a significant drop in the share price could add years onto their timeline. Achieving their retirement goal may require continuing to work longer or adjusting their lifestyle. Other examples abound, such as purchasing a second home, paying for kids’ education, or becoming debt free. Getting as clear as possible by quantifying the effect of your concentrated stock position on your goals is, to my mind, perhaps the most critical step you can take.
But how do you begin framing such an analysis? Below are three questions that may help you get the ball rolling:
At what average price must I sell the stock to achieve my goals?
If the stock price recovers to a certain level, how will my future be benefited?
If the stock price drops further, at what point will I no longer be able to recover?
These are, of course, just three examples to help you start evaluating the impact of your company stock on your goals. In my experience, there are countless meaningful ways to structure these questions. The sway of your company stock can only be put into real, tangible terms by understanding the things that are most important to you.
Conclusion
When your company's stock price drops, it is a challenging and painful experience. However, market swings are part of investing, and even the largest, most well-established companies go through ups and downs. To assess the situation, you can:
Review your company’s financial statements
Listen to the earnings calls
Identify the reasons for a price drop
See what the market expects from your stock
Calculate the impact on your goals
These five steps will go a long way in demystifying the situation and providing you with far greater clarity on the actions to take next.
In the upcoming installment of this series: “My company’s stock price is down, now what?” I’ll cover the pros and cons of continuing to hold onto the stock. In the meantime, if you’d like a review of your concentrated stock position or an analysis using the techniques discussed above, please reach out to me here.
Disclaimer: This is a blog post and is not intended as investment, tax, or legal advice. Please do not misconstrue it as any of those things. The content is intended for informational purposes only and should not be relied upon for making investment or financial decisions. Everyone’s situation is different; obtaining guidance from licensed, experienced professionals prior to taking (or deferring) any action is advised.