Tuesday, October 31, 2006

When Growth Goes Bad: Wal-Mart & JetBlue

Monday's WSJ carried an article by Justin Lahart in his "Ahead of the Tape" column. It looks like Mr. Lahart needs some remedial financial theory work.

Yesterday's piece focused on how Wal-Mart's and JetBlue's stock prices rose when the companies announced plans to trim growth, via spending cuts.

Mr Lahart's bolded lead sentence reads,

"Advice for companies looking to jump-start their stock price: Stop spending."

Well, Mr. Lahart, at least you got it half-right. What he has observed is a simple example of the effects of unprofitable growth. When it slows, the company's total return may actually rise. Hard as this may be to believe, this concept has actually been understood by business people across America for over a quarter of a century.

Thus, when badly managed companies announce the abandonment of badly implemented or reasoned spending on ill-advised growth strategies, their stock prices may well rise.

This by no means implies that companies such as Apple, Google, or other profitably and productively growing companies should trim their growth spending. However, Amazon, which has had management problems for some time, also saw its stock price benefit from an announcement concerning its slowing of spending on growth initiatives.

Conditionality is everything in these situations.

On a related note, on the same day, CNBC's resident human version of a ticker tape, Bob Pisani, on the floor of the NYSE, attempted to project Wal-Mart's slowing sales growth to the entire sector and economy.

Memo to Bob:

FYI, Wal-Mart undertook a massive retail merchandising transformation last year, and it has failed. This is a major reason why its sales are disappointing. It does not necessarily have any bearing on other, better managed retailers.

Best regards,

-The Reasoned Sceptic.

It's sort of scary- and perhaps appropriately so, on this Halloween afternoon- that CNBC disseminates such ill-informed, half-baked reasoning live from the exchange's floor, and implies that it constitutes "news" on which investors may rely for their portfolio management.

So, to summarize, we have one reporter at the nation's premier business daily, and the on-air reporter for the nation's major business news television channel, both missing the nuances of cause and effect in Wal-Mart's recent actions and announcement of disappointing sales performance. And, though differently, each reporter then erroneously attempted to base further conclusions about the economy on factors particular to Wal-Mart, and, in the case of the WSJ's Lahart, a few other mismanaged, investment-spending paring firms.

God save us from our national business news media "news" reporters.

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