Market Watching: How Popular Companies May Undercut Your Expectations
Nathalia De Souza
Econ-1B-L01
West Hills College LemooreAbstract
In this paper I hypothesized that investing in popular or familiar companies is not always the best choice for investors. I did this by using stock value information from the assigned Market Watch Virtual Stock Exchange game. I also used evidence from recent articles to described how fluctuations in stock value were often related to recent news. I also included my expectations as to why stock might fluctuate in the future based on predicted trends. Mainly, this paper focuses on how popularity and reputation play a role in the stock market.
Market Watching: How Popular Companies May Undercut Your Expectations
Popularity and reputation are two important things that affect the stock market. When we buy groceries, shop for food, or even browse for new technology, these two things influence our actions. People tend not to stray far from what they consider familiar and comfortable. Because we expect these stores and companies to maintain good reputations, we also tend to expect their stocks to remain relatively stable. This semester I chose to use this reasoning while playing the Virtual Stock Exchange game by Market Watch. Coming into this game with limited knowledge on stock and never having dabbled in investment before, I came across many difficulties. For this reason, I chose to start off by buying what was familiar to me. By applying various forms of reasoning to my purchases, I developed a portfolio of ten different stocks that varied in value. I reasoned that, since winter was fast approaching, investments in the field of medicine would payoff because of the upcoming flu season. Moreover, I anticipated that retail stock would also increase as the gift-buying season neared. One final prospect that led me to purchase stock regarded the long term growth of sustainable transportation. Although diverse areas, I invested in only the most popular companies in each. I figured that since they had a preexisting status of being well-liked, their stocks would not be very volatile. After many weeks of playing Virtual Stock Exchange, I have learned a lot about how stock is disappointing, more often than not—especially if you invest in companies you admire.
CVS
One of the first stocks I chose to invest in was stock for CVS Health. According to the company’s website, CVS Health is the “largest pharmacy health care provider in the U.S. [and it provides] integrated offerings across the spectrum of pharmacy care.” As my personal pharmacy in recent years, I tend to keep up with the company’s latest news. Although I did not do this regularly before my semester in Econ-1B, I chose to keep myself updated while playing Virtual Stock Exchange to see if popular news would affect the company’s stock.
The best example of this concerns CVS’s recent endeavor to purchase and merge with a leading healthcare insurer. Nearing the end of the year 2017, CVS Health announced its intentions to initiate a merger with Aetna, “the country’s third largest health insurer,” (Japsen, 2018a). The two companies, being of such large influence in health care, were watched closely by government antitrust regulators (Japsen, 2018d). After going through months of legal proceedings before a court, the Department of Justice agreed to clear the deal once Aetna agreed to sell its Medicare prescription drug plan (Japsen, 2018b). Following this sale, the two companies finally began making some ground on the merger. On October 30th, 2018 Forbes released an article quoting executives from Aetna. It mainly concerned their goals and plans for merging and expanding their horizons under the management of CVS. Aetna’s executive vice president Shawn Guertin assured Forbes that he was “confident that the combined company [would be] well positioned to begin the next stage of [its] journey,” (Japsen, 2018a). On the same day as that article was released, CVS stock held steady at $72.3900 per share. But, in the span of fourteen days, stock for CVS shot up to $80.8000 per share—its highest this year since its peak on January 29th of 2018 (Market Watch). Since then, the plans for merging have been ironed out. On November 28th, plans for CVS and Aetna to merged finally closed. As the difficulties of merging arose, the company’s stock saw increasing fluctuations in value. Despite struggles in getting some states to agree with their motives, CVS achieved success by promising not to hike up premiums and reassuring everyone that it would fulfill its role as “the front door to quality healthcare” (Japsen, 2018d). All in all, news concerning CVS truly affected its stock, both negatively and positively.
Amazon
Everyone has a retail store that they love and shop at religiously, be it for groceries, clothing, or other everyday items. In my family, this store is Amazon. I use it to purchase birthday gifts, school supplies, and even accessories for my home. Because the company is so well-known, I invested in it thinking that my money would be safe, and that I would see a quick return. Unfortunately, stocks from this companies taught me that what we are most familiar with is not always what is best for us.
As an Amazon Prime member, I find myself using the company’s convenient website and quick delivery times for many of my last minute needs. By applying this logic to other shoppers, I figured that, as the holiday season approached, stock would increase in value as people bought more items off of the site. When I purchased Amazon’s stock, its value was $1,760.9500 per share. I figured that the upcoming holiday season would give me quick returns, but I was disappointed to see the stock gradually decrease after my purchase. It turns out that this has been a tumultuous year for Amazon. As the richest person in the world, CEO of Amazon Jeff Bezos faced much backlash in June from critics in Seattle due to Amazon’s “[squelching of] a new corporate head tax to fund homeless services” in the city (Weise, 2018a). Although the backlash was severe, Amazon stock was mostly unaffected. In response to the criticism, though, Bezos decided to shell out money in a philanthropic measure to assure consumers that he only wanted the best for the community (Weise, 2018b). Elizabeth Weise of USA today said that “Bezos sent out a long Tweet introducing a $2 billion Bezos Day One Fund that will support two charities, one aimed at homeless families, the other at creating high-quality preschools in underserved communities” (Weise, 2018b). Although some argued that it was a mere political stunt, Amir Pasic, the dean of the Lilly Family School of Philanthropy at Indiana University is quoted as having said “Who in their right mind would argue against trying to help homeless people and underserved preschoolers?” (Weise, 2018b). Either way, amazon stock stayed near $1,900 during this debacle, as people wondered whether or not they should give up their stock.
In keeping good faith with the company, I chose to stick with the company and see what the end of the year had in store. Though I initially invested $26,414.25 in the company, the value of my stocks dropped to $23,878.65 in the span of three months. By looking at recent news regarding Amazon, I was led to suspect that the culprit of this drop was the company’s decision on where to open its new headquarters, also referred to as HQ2. In September of 2017 the company encouraged cities across the United States to bid between themselves to home the new headquarters. The cities were fighting for the $5 billion facility and the possibility of 50,000 jobs it could provide. After months of decision-making, the two cities chosen to split Amazon’s HQ2, were revealed to be New York, New York and Arlington, Virginia (Jensen, 2018). Despite much backlash from the public, Amazon has stayed true to this plan. I decided to keep a close eye on the company throughout this turbulent period, in which the company’s stock managed to drop almost $140 per share. Criticism from the public surrounding concerns that the new HQ2 projects will deteriorate quality of life in the chosen cities has cause stock value for Amazon to steadily decrease. As the public continues to turn its back on this company, we can see its stock reflect that.
Tesla
One final stock that I would like to focus on is that of Tesla Incorporated. Tesla is a company focused on bringing renewable energy and sustainable electric vehicles to the forefront of society. I invested in this company because the idea of electric, eco-friendly cars has always enticed me. When I invested in this stock, shares were $259.5900 each, and I bought five at a total of $1,297.95 invested. At the time of my purchase, Tesla was going through a rough time because of its CEO, Silicon Valley tech entrepreneur Elon Musk. After making some jokes in bad taste on his Twitter account about “taking Tesla private,” Musk and Tesla were each charged a fine of $20 million to “be distributed amongst investors who lost money as a result of Mr. Musk’s tweets,” according to the SEC (Kollewe, 2018). Additionally, Musk chose to step down as board chair of Tesla, but kept his position as chief executive. According to Julia Kollewe of The Guardian, Musk “agreed to step down as chair for three years and pay a fine in a deal with the US Securities and Exchange Commission over tweets he made about taking the firm into private ownership.” On the day of his tweet, Tesla’s stock reached its peak of the year at $379.5700 as worried shareholders rushed to double down and invest more money in the company before its suspected privatization. As stock plummeted afterwards, Tesla did not see its value settle until October 1st, when Musk finalized his settlement with the SEC (Kollewe, 2018). Despite the clearly embarrassing debacle, Musk stayed true to his reason, tweeting once more that the whole farce was “so worth” the $20 million in fines. Since then, Tesla’s stock has not seen too much fluctuation. Nonetheless, this one example of an arrogant executive’s badly worded joke shows just how easily stocks can fluctuate when the public sees or hears something it feels strongly about.
As my endeavor in stock investment comes to an end, I hope that my misadventures and struggles with popular companies serves as a message to those that will com after me. Throughout my attempts to form a successful portfolio, I have come to understand how reputation and popularity can be a double edged sword. The main takeaway is that, sometimes, our favorite companies do not make the best investments. This can because of a history of drama, a series of badly timed changes, or even just one person’s slip up. Nonetheless, it goes without saying that people looking to invest should not do so loftily and without thought. Instead, we must try to look past our preferences and biases and look to invest in the stock that will benefit us the most.
References
About. (n.d.). Retrieved November 30, from https://cvshealth.com/about
Japsen, B. (2018a, October 30). Aetna Reports $1B Profit As Sale To CVS Health Nears Closing. Retrieved from https://www.forbes.com/sites/brucejapsen/2018/10/30/aetna-reports-1b-profit-as-sale-to-cvs-health-nears-closing/
Japsen, B. (2018b, November 15). California Clears CVS-Aetna Deal After Concession To 'Not Increase Premiums'. Retrieved from https://www.forbes.com/sites/brucejapsen/2018/11/15/california-clears-cvs-aetna-deal-after-concession-to-not-increase-premiums/#4b0a6539814a
Japsen, B. (2018c, November 28). CVS-Aetna Deal Closes With Vow To Change 'Consumer Health Experience'. Retrieved from https://www.forbes.com/sites/brucejapsen/2018/11/28/cvs-aetna-deal-closes-with-vow-to-change-consumer-health-experience/#26557aec1ddc
Japsen, B. (2018d, October 10). DOJ Clears CVS-Aetna Deal Once Medicare Drug Plans Are Unloaded. Retrieved from https://www.forbes.com/sites/brucejapsen/2018/10/10/doj-clears-cvs-aetna-deal-once-medicare-drug-plans-unloaded/#10ab9d647d58
Jensen, N. M. (2018, December 14). The Amazon HQ2 Fiasco Was No Outlier. Retrieved from https://www.wsj.com/articles/the-amazon-hq2-fiasco-was-no-outlier-11544800749
Kollewe, J. (2018, November 08). Tesla: Robyn Denholm named as new chair to replace Elon Musk. Retrieved from https://www.theguardian.com/technology/2018/nov/08/tesla-names-new-chair-robyn-denholm-to-replace-elon-musk
Weise, E. (2018a, June 18). After losing fight to levy 'Amazon tax,' Seattle is back to square one on helping homeless. Retrieved from https://www.usatoday.com/story/tech/2018/06/17/after-amazon-tax-fails-seattle-has-no-clear-path-help-homeless/698575002/
Weise, E. (2018b, September 13). Amazon CEO Jeff Bezos announces $2 billion fund to build preschools, help homeless families. Retrieved from https://www.usatoday.com/story/tech/science/2018/09/13/amazon-ceo-jeff-bezos-announces-2-billion-charity-fund/1289788002/