Do corporate management teams and board of directors manipulate stock prices?
You bet they do.
Despite being charged to act in the best interest of shareholders, those running publicly traded companies will often go to extremes to convince the market of value that may or may not be there.
We all remember the stories of the accounting games that were used to feed the Wall Street beat-the-estimate game. In the days of the crazy bull market, beating the number would be rewarded with huge gains in stock value.
Now those days are over, and we are in a different market and economic environment, but the temptation to manipulate a stock is still alive and well in corporate board rooms.
Case in point is Sears Holding Corporation (NASDAQ: SHLD).
The owner and operator of Sears and Kmart stores reported losses yesterday that were wider than expected. The company lost more than $1 per share on revenue of $10.7 billion.
Excluding special items, SHLD lost 90 cents versus an expectation of minus 49 cents.
The big losses in the period were widely expected. What was not expected was the company pulling future guidance given the weak economy.
Typically, such lack of confidence in the future is met with skepticism by the market. Perhaps that is why in announcing the news SHLD also mentioned that it would start buying back up to $500 million of stock.
Now why would they go and make that statement, especially at a time when cash is king?
Instead the company should take a look at using that $500 million as a way to pay off debt.
SHLD has close to $4 billion in debt. Why on earth aren't they using cash to pay down some of that debt?
It makes no sense to me and does little to inspire confidence in management's ability to navigate these difficult waters.
The market disagrees. Or should I say the lemmings that are susceptible to being easily manipulated took the bait.
Shares of SHLD were up $6 during the day after the news was released. The stock finished the day at almost $37 per share.
Go figure.
Announce earnings that miss big and pull your guidance, and somehow that is positive news!?!
If the market rewards manipulative behavior it is likely that such behavior will continue.
Would I be a buyer of SHLD on this news?
Not if my life depended on it.
A big debt burden at a time when losses are accelerating does not bode well for the future of SHLD.
Yes, book value is well north of current share price, but for good reason. Even there, I don't have much confidence in the value of assets on its books. Real estate prices are dropping hard and the commercial market is far from reaching a bottom.
To me, this has all the makings of a business that ultimately fails from the perspective of common shareholders. That is why using cash to buy stock should be viewed as an insult.
Anyway, I guess the news should not be a surprise. Nothing ever changes much, including management ineptitude.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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Reader Comments (Page 1 of 1)
12-03-2008 @ 5:29PM
VINNY said...
GREAT ARTICLE I THOUGHT I WAS GOING CRAZY..AFTER READING THE EARNINGS..THERE IS NO WAY IN HELL THIS STOCK IS WORTH CLOSE TO $20-VS-$37. IT WAS DOWNGRADED AS YOU WELL KNOPW TODAY BY GOLDMAN FROM 48 TO 28....FINALLY IT LOOKS LIKE THE MARKET IS STARTING TO GET IT..AFTER HOURS IT'S DOWN...LOOKS LIKE ANOTHER ENRON HERE I WOULD LOVE TO REALLY SEE THE REAL BOOKS
12-03-2008 @ 5:43PM
joe said...
it makes perfect sense actually. if your an executive there with stock options what would you do? Dont ever let a public company fool anyone when they say "best interest of the shareholder". what needs to be defined in that statement is "which shareholder".. the only ones that matter are the executives with stock options on the line. thats what they dont tell ya.
12-03-2008 @ 6:07PM
Daniel said...
Alywin Lewis........WHAT A PIG!
12-03-2008 @ 6:19PM
JS said...
I would check your math. Sears has $2.9bn of debt last time I checked or $3.6bn including capitalized leases. It has a 6.6x TTM EBITDA/int coverage. I'm not saying that Eddie knows how to run retail - nor am I saying that continued share buybacks are the best use of cash - but SHLD is well positioned to survive the credit crunch. It's moderate lever of leverage will not kill it.
12-03-2008 @ 11:13PM
BHarrison said...
It is this type of "manipulative shenanigans" by insiders with stock options that undermine the integrity of the maket and the corporatons.
The American people have been DUPED extensively and for too long to tolerate this type of crap; there simply is not enough INTEGRITY in the market for me to risk investing money in it. We've had "truth in lending laws", and "sound accounting practices/standards" that have been agregiously ignored and violated with impunity for far too long.
If Congress and the Fed do not restore reasonable INTEGRITY to the market, it is going to be a long and arduous Recession / Depression. If the corporations are not held accountable for their representations, then the market becomes like a sleezy, dishonest used car lot. And I'll be damned if I buy into that.
I might lose some money via inflation by keeing my money in cash or cash accounts; but I'll be damned if I am going to set myself up to be substantially ripped off by baltant lies and market manipulations. How is this much different than the scams bo the "derivative markets"????
No thanks, Ill wait until they restore integrity and reasonable regulation of the FIs and the markets.
12-04-2008 @ 7:37AM
BHarrison said...
Pivotal aspects of the recovery are Congress' formulation and implementation of basic reasonable regulations of the FIs and the corporations which would include: 1) requirements for strict adherence to "good accounting principles and standards"; 2) prohibitation of "creative accounting principles"; 3) Requirements that all financial auditing firms comply with these "accounting standards; 4) the holding of CEOs, CFOs, and Boards of Directors to be personally responsible for corrupt actions; 5) Requiring that publicly held corporations of values set at a specific level be required to be fully audited on a regular basis; and that the financial auditing firms be changed every year or two to be deter fraud.
Both the Fed and the Sec should be required to be more diligent in their oversight and regualtion of the FIs, markets, and corporations.
Diligent and aggressive investigations, indictment, and prosecution should be provided for "white collar crimes" of management. This is the only deterrent to further corporate financial crimes.
These regulations do not have to be stiffling to our economy; they merely will require that INTEGRITY and Full Disclosures be provided in the market place to remedy the previous rampant FRAUDS and decptions that have so extensively undermined the investors "faith and confidence" in the markets and the corporations. If this cannot be accomplished then our nation is truly in a pathetically desperate and unethical state of being.
At this point there simply has not been adequate disclosures to return any integrity to the markets for investors; and manipulative insider actions such as reported in this article are just too flagrant to warrant investors returning to the markets.
Most Americans have probably come to realize the potential high risks fo being DEFRAUDED by the insiders and the special interests groups in both the markets and the corporations. It has been revealed to be a "sucker's game" for the average investor.