Do share prices move because of quarterly profits – or is it a furfy?
|SEEKs share dips – apparently on Executive decision to invest strongly in R&D and Long Term Strategies of accessing offshore markets in lieu of short term profits. |
SEEK’s chief executive is taking a stand against short-termism among investors unhappy with his plans to spend aggressively to build a global online job search giant…. With fewer Australian companies investing in growth, investors are showing no tolerance for slowing profits.
Last week, CSL chief executive Paul Perreault committed to interrupting a decade of double-digit profit growth for just the second time to invest in his manufacturing and sales force and two new drugs treating haemophilia due in 2017. The stock fell as much as 6 per cent in response.
Is it true that investors care only about quarterly earnings and short-term stock prices, so companies skimp on R&D?
James Surowiecki in the New Yorker, makes an interesting declaration: short-termism is myth. http://www.newyorker.com/magazine/2015/08/24/the-short-termism-myth
According to his article, companies are investing heavily in R&D and getting strong returns as a result of it.
In a profit-oriented context, investments in knowledge like R&D or knowledge management are easy targets when firms face quarterly earnings pressure – but is that the right decision?
People back innovation and strategic thinking
- Cuts can yield immediate increases in profit, but the impact of those cuts on long-term sustainability can be devastating, as Dell [DELL], Hewlett Packard [HP] and Sony [SNE] have discovered.
- Companies like Amazon and Tesla and Netflix, whose profits in the present have typically been a tiny fraction of their market caps, have been able to command colossal valuations.
- There a steady flow of I.P.O.s for companies with small revenues and nonexistent earnings.
- The biotech industry is now valued at more than a trillion dollars, even though many of the firms have yet to bring a single drug to market.
None of these things are what you’d expect from a market dominated by short-term considerations.
Share value is based on perception by the public, and the ability for the executives and board to make the stakeholders feel comfortable about the risk they are taking in R&D having the potential to generate exceptional returns.
Its all about communication and trust.
If you believe in the Board and Executive in SEEK or any stock that you invest in, and believe in their long term vision and its people, short term profits should not be a factor in determining your support of the share.