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Fear and volatility in the stock market these past few weeks have been extreme. Wild intraday and overnight swings add even more stress to the mix. As a result, we have to be more selective with our trades.
But for some corporate executives, a market correction like this is a unique opportunity that can't be missed.
Because there's nothing like a storm of bad headlines to cover up some of your own bad news.
That's going to be a big market mover in the weeks ahead – and it could have a big impact on your portfolio.
Investors that believe they're heading into a run-of-the-mill earnings season could be walking right into an ambush.
Here's what you need to look out for…
Companies Never Waste an Opportunity
Back in early 2017, Brazil's economy was in dire straits. Unemployment was skyrocketing, and Brazilians were saving whatever money they had for only the most crucial expenses.
To most of us, beer is not a crucial expense. So beer sales hit a slump in Brazil.
As you can imagine, this hurt Anheuser-Busch InBev NV's (NYSE: BUD) revenue. As the largest brewer on the planet, the company relied heavily on the large Brazilian market.
With the company's quarterly earnings report coming up in early March 2017, executives knew shareholders would be unhappy. The company was going to miss its guidance for earnings, and by a big margin.
With bad news inevitable, someone at Anheuser-Busch figured that this was an excellent opportunity. Shareholders were already going to be very unhappy about a decline in profits, so why not add some more bad news to the mix – it's not like the market's response will be much worse, the thinking went.
So executives and accountants made sure all the bad investments, project misses, and other costs that had been shuffled around in accounting would show up in this one earnings report.
All the mistakes and missteps that had been hidden through some creative accounting showed up at once.
Anheuser-Busch released its earnings report and missed Wall Street's estimates on almost every single metric. Things got ugly. BUD dropped 3.3%.
But by May, the stock had recovered and then some.
What those executives had done is called "kitchen-sinking it." That's the Wall Street term for when a company takes advantage of some inevitable bad news, whether it's a natural disaster, policy decision, or something else, to also release all the other bad news executives have been sitting on.
The thinking goes that lots of bad news at once is easier to digest than a string of negative headlines. New CEOs like to kitchen-sink it when they start, to reset expectations and start with a clean slate.
It also helps lower the starting point for their stock options.
This approach worked for Anheuser-Busch in 2017, and for many other companies before and since.
But traders who got in just before the kitchen-sinking suffered each time.
And with the coronavirus epidemic now spreading globally and gripping traders with fear, we're about to see a new wave of companies kitchen-sinking it…
Bad News Is Coming from Where You'd Least Expect It
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.