Course 203: Understanding the News
Newsworthy Events
In this course
1 Introduction
2 Stock Indexes
3 The Dow Jones Industrial Average
4 The S&P 500
5 The Nasdaq Composite
6 "Noise" Versus News
7 Negative Earnings Surprises
8 Analyst Upgrades/Downgrades
9 Newsworthy Events
10 The Bottom Line

Other times investors will hear about events that have them running for cover, and rightfully so. One such event is the announcement of a regulatory investigation by an organization such as the Securities and Exchange Commission or the Department of Justice. While such announcements by themselves by no means predict impending doom, who knows what nasty surprises may lurk for investors as regulators start turning over rocks? In recent history, plenty of investors have been burned badly by such investigations, including Enron, Tyco (TYC), and WorldCom in the early 2000s, scandals at Countrywide and other firms in the wake of the financial crisis, and a string of more-recent scandals at Chesapeake Energy.

Another item to be wary of is a significant lawsuit. Corporate litigation is almost everywhere you look (these days, it's almost a normal part of doing business), and estimates of any significant legal damage are usually already priced into a stock. However, lawsuits often attract others, which could place very large uncertainties on a company's performance.

Changes in regulation can also affect the value and future prospects of a company. For instance, in addition to facing thousands of lawsuits, cigarette maker Lorillard (LO) also faces the threat of potential increased regulation of menthol cigarettes (which account for roughly 90% of its volume) from the Food and Drug Administration. Should the FDA choose to meaningfully restrict or ban menthol cigarettes (which the agency has been investigating), Lorillard's financial performance would likely collapse catastrophically.

Next: The Bottom Line >>


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