Labour strife? Bring it on.
While conflict within companies can be unsettling to those directly involved, outside investors should take delight. Markets have a notoriously short-term and nerve-racked approach to just about everything, and bitter disputes between management and unions is no exception.
The whiff of a looming strike can hammer share prices or at least hold them back from their true potential. But new investors looking to profit from this turbulence should be more than happy to step into the fray.
Two highly profitable examples come to mind.
In early 2000, Boeing Co. suffered through a lengthy strike among its engineers and technical workers, representing about 10 per cent of the company's work force.
The news surrounding the strike was awful: The aerospace giant missed dozens of plane deliveries, a research project into a new airliner was delayed, and analysts slashed their profit expectations for the quarter by as much as 40 per cent. The strike weighed on Boeing's share price, too. By late March, it was down more than 30 per cent from its high earlier in the year.
The fear is that a labour dispute will cripple a company and reward its competition. If the strike persists, no work gets done. And if the strike ends with workers winning big wage concessions, then the company's competitiveness will be hobbled, perhaps permanently.
This might be true for companies operating within struggling industries, where payrolls are constantly being slashed and profitability is more of a hope than an expectation. Labour disputes at car manufacturers and airlines are nothing but trouble.
However, the reality is that most disputes among thriving companies come to an end relatively quickly, with little or no long-term damage. Regardless of which side emerges victorious, most of these companies go on to bigger and better things, and investors quickly realize it.
In the case of Boeing, the shares surged 80 per cent in 2000, after the strike was resolved.
The company is by no means an anomaly. Just five months ago, 45,000 Verizon Communications Inc. workers, representing more than 20 per cent of the U.S. telecom giant's work force, went on strike. The action threatened service calls and telephone and Internet installations.
Curiously, Verizon's share price hit its lowest point of the year – down about 12 per cent from its earlier high – on the day the workers walked out. By the time the strike had ended, two weeks later, the share price had already rebounded 5 per cent, suggesting that the threat of a strike, rather than the strike itself, was the biggest drag on the stock.
And by the end of 2011, Verizon shares were up more than 20 per cent from their low point when the strike began.
If you believe in the contrarian strategy of buying stocks when there is proverbial blood in the streets, then buying stocks when strikers' oil drums are burning isn't so bad either.
David Berman