Following this discussion:
The general consensus was: Always bet against the angry lynch mob. Their emotional rage dies out within a month, the fundamentals don't.
This was the highest rated comment by /u/rationalcomment
So I decided to look into it as this was not the first time I had heard about this phenomenon and it definitely goes against my natural instincts- apparently, companies with sound “fundamentals” always bounce back and often have incredible gains after about 4 weeks following an incident that sparks public outrage.
And this is how the UAL STOCK BEHAVED
On April 13/2017 UAL closed @ $69.07, with a farther dip to $67.75 after the CEO defended his employees with his “re-accommodating” comment and everyone grabbed an extra pitch fork- this translated to a drop of about 5% from its April 10/2017 closing .
May 12 2017, or about 4 weeks after the incident, UAL closed at $76.41 which is almost a 13% gain since the dip. http://ift.tt/2p3pyOu
In summer 2009, UAL had an incident with a Canadian musician and his guitar, and there was a dip and bounce in the following 4 weeks. The video was released on July 6 2009. UAL opened at $3.31 on 6 July 2009, dipped to an intra-day low $3.07 (-7.25%) on 10 July 2009 but traded as high as $6.00 (+81.27%) four weeks later
Interestingly, this phenomenon checks out on both occasions given the PR disasters-but how and why is this possible?
Lets compare it to a similarly sized company in the industry such as Southwest LUV.
NB. I use fleet size when evaluating an airline's size. There are other metrics such as passengers carried, destinations, assets etc but for an airline business, to quite one of my profs, “it only makes you money when the plane is in the air; when it’s on the ground, it is costing you money”-this is a very simple way of looking at the big picture but I can qualify it in more detail. UAL has 738 to LUV’s 727
Since April 10/2017 to May 12 2017 LUV has had a 6% gain while UAL has had 11% gain in the last 4 weeks.However, looking back to the beginning of the year, UAL has had modest gains of about 5% ($72.71-$76.41 YTD) while LUV has had about a 14.5%($49.98-$57.22YTD) gain in the same time period. If you are just looking at the last 4 weeks, UAL performance is quite impressive and this what the proponents of the phenomenon are reporting. Remember, they reported an 81.27% upside in 2009 after 4 weeks of that video being released?
Lets look at some historical trends beginning with just before that video was released in 2009 4 weeks before the video was released, UAL opened at $4.99 i.e. Jun 8 2009 while LUV opened at $6.91. Both saw a slide in their share price UAL-33.6% & LUV -6.3% i.e. $3.31, $6.47 respectively.
It would be interesting to see how the two compare if LUV had suffered a 33.6% loss i.e $6.91+33%=$4.58
Had both these companies suffered a 33% slide, LUV would be starting its recovery at $4.58 while UAL starts at $3.31/ The quote on wikipedia says UAL traded as high as $6.00 (+81.27%) four weeks later and presents this as evidence to this phenomenon.
Now lets see what happens when we apply an 81.27% upside to LUV i,e, $4.58+81.27%=$8.30
On Aug 6 2009, LUV actually had am intra day high of $9.19 and closed at $9.15 or 100.6% upside. This is how proponents of this phenomenon would have presented their material had this exact same incident had been with LUV.
Without the fictitious event, LUV had a 42% upside in the period outlined
What proponents of this phenomenon conveniently fail to mention is that the stock had been trending downwards to this point for other unrelated reasons. But the video certainly didn’t help.
Now, it is difficult to determine how much of 82% was part of a general recovery industry wide (AAL 19%, DEL 10%, LUV 42%), or a reaction to rumours of a merger? -United was in active negotiations with Continental at this point and a merger was signed in May 2010.
On close Friday, UAL was up 12.78% from its low of $67.75 during the bad press in early April. The week before this incident, UAL, on average, traded at about $70.60. Given this as the starting point and adding 11%, UAL, would be closing at about $79.62. This lag is compounded when you consider there was a 10% dip previously due to another unforced error in 2009.
And there is no way of determining how much more United had to pay for Continental shares given that this initial scandal happened so close to coming to an agreement g-this was an all-stock-deal worth about $3bn.
In their latest scandal, UAL has had to revise their overbooking policy, which made airlines a lot of money and made it very generous to try and kill the bad press. Delta is now offering up to $10k for an overbooking error which is way above industry standards and govts are looking to introduce legislation on this practise. I'm not convinced the company has realized all its losses from a 13% gain in 4 weeks but I maybe wrong. However,a big part of the airline business fundamentals, is customer service, and while I'm not part of the lynch mob, I'm not willing to bet against them.
tl;dr- This quote on wikipedia on the stock price effect, is somewhat misleading as it suggests that losses following bad publicity are usually recovered within 4 weeks. The quote uses the UAL broken guitar incident in 2009 that purportedly had more than an 80% upside within 4 weeks. In fact, anyone who bought this stock a year prior, i.e mid August 2008,(UAL $10.22) to this event, was still down more than 40% in mid August 2009 (UAL $6.38) despite the surge. Bad press does affect the stock price negatively, and does remain depressed relatively beyond the purported 4 week threshold.
Submitted May 15, 2017 at 05:48PM by alwaysoz http://ift.tt/2pP5Gi4
