Headline risk is something to avoid when picking a stock. If you opened The Wall Street Journal and found out that a company's flagship product bursts into flames, you'd probably want to steer clear of that company's stock.
Reading that another product from the same company shakes itself so much that it breaks would only increase your aversion.
If you then found out that authorities wanted to arrest the vice chair of the company on charges related to bribery and embezzlement linked to a national political scandal, you'd probably think that company was headed for dissolution.
All these things have happened to Samsung Electronics over the past year, yet the company's Korea-listed stock is near all-time highs, and Samsung just reported its strongest quarterly profit in more than three years.
Perhaps headline risk isn't so bad if you know what's what. The way to deal with headline risk is to understand a company before you buy the stock. Always ask yourself what will go wrong. Then look back in the history of the company and see how it got through its challenges in the past and how shareholders were affected. One of the best ways to make money over the long haul is to think like a contrarian and go against the herd mentality.
Now, North American retail investors will have a hard time investing in Samsung Electronics. As CNN Money has noted, the company has no shares listed on a U.S. exchange and no official American Depository Receipts. Its U.S. over-the-counter stock (ticker: (SSNLF) ) is so illiquid as to be a very risky investment.
That said, looking at the company and its Korea-listed stock provides important lessons.
Samsung Electronics in the past year has seen a flagship smartphone incinerate forcing a global recall. And its appliance division saw a recall when some of its washing machines shook themselves to pieces. And Lee Jae-yong, the son of Chairman Lee Kun-hee and assumed to be the next top executive, was sought for arrest this month on bribery and embezzlement charges, although a court later rejected the arrest warrant.
Yet, none of this Samsung hasn't dealt with before. Back in the 1980s the company had various recalls and faulty phones. Lee Kun-hee regrouped and shifted resources to component manufacturing before redoubling efforts to make class-leading phones that now are the global leaders.
And European regulators have charged the company more than once with price fixing, yet Samsung has paid the related fines and moved on.
These and other apparent company killers have challenged the world's leader in several technology markets, but shareholders continue to come out on top. Samsung's Korean-listed stock (Korea Exchange:005930) have risen a whopping 63% over the past year while the local Kospi Composite Index has risen only 9.9%.
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The background here is that Samsung, the company without cheering analysts, is the global go-to source for four core product lines.
First, its digital devices and appliances are found in homes and offices around the planet far more than Apple's. And despite the recall on those aforementioned washing machines, its products are considered top of the line in most cases.
Second, its telecommunications products are market leaders. For phones, Samsung is the No. 1 seller, with a smartphone market share of 21% for the third quarter of 2016, according to IDC. No. 2 Apple had a 12.5% market share.
Third, its chips and processors are found in nearly every electronic gizmo and device out there under other brands, including Apple. That's right: Despite bitter patent litigation between the two companies, Samsung has long been a top supplier for Apple's iPhones.
Fourth, when it comes to LCD panels -- from phones to tablets to televisions and every other screen -- Samsung is the No. 1 maker for just about everyone else's products. And either for its brand or under contract by others, Samsung is the top television maker.
Little hard technology is built or sold anywhere without Samsung's development assistance and production, including Apple -- which would be flat on its face without Samsung over the past decade. And that's why despite the headlines noted above, the company keeps delivering and the Korean stock market recognizes the stock as a bargain.
Famous tech companies tend to trade at multiples of trailing revenue, and Apple has a trailing 12-month price-to-sales ratio of 2.9. But Samsung's Korea-listed shares traded at a trailing price-to-sales ratio of only 1.3.
That makes Samsung stock a bargain for those able to purchase it. It also shows that the market is responding rationally to the company's increased sales, but it's not getting ahead of itself. Apple's higher valuation leaves it highly vulnerable to be sold off on a market whim, or on one quarter of disappointing results.
Meanwhile, Samsung's national pension plan has 9% of its own portfolio invested in Samsung Electronics stock. That's something that Apple doesn't have to defend it in the U.S. market.
And a few more good things. Samsung has been working with institutional investors to increase shareholder returns. First, it has announced that it will boost its dividend. Second, it is buying back shares.
Meanwhile, Samsung Electronics is becoming a Texas resident of sorts. The company is in the process of building a massive semiconductor factory in Austin and has said that it will invest $1 billion in it. This could win it favor with a Trump administration, which has said it wants to increase manufacturing jobs in the U.S.
In sum, this company has turned itself into a global manufacturing powerhouse able to brush off recalls and scandals. Look to compare and contrast Samsung with the next company you think might have headline risk. And if some U.S. activist investors get their way, someday you just might be able to profit by buying U.S.-listed shares of this successful electronics company.
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