A Company I Own Is Spending More on Employees. Good or Bad For My Holding?

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The workforce has been a theme in stocks of late, as the coronavirus pandemic has spurred historical levels of layoffs. But with certain companies now rehiring furloughed and laid off workers, investors are left wondering: what does all this mean for their portfolios?

To answer this question, let's look at a real-world example.

In the early stages of the coronavirus pandemic, there were several rounds of layoffs at auto manufacturers like General Motors  (GM) - Get Report and Ford  (F) - Get Report. Some of those layoffs came before investors had fully appreciated the extent to which these automakers were seeing falling demand.

When General Motors announced they were laying people off, the company was telling investors they had to cut jobs because they didn’t need as many workers, and that they weren’t expecting to sell as many cars. This is what we call earnings and stock price negative. 

But recently, we’ve seen some really encouraging decisions from management teams to rehire workers and we’ve seen stocks do well in the midst of this information.

Take Shake Shack  (SHAK) - Get Report. The burger company recently reported earnings. The market had known since late February that Shake Shack’s sales and earnings would be severely dented by the pandemic as people stayed home. Indeed, Shake Shack had a round of layoffs.

But on earnings, Shake Shack said it is rehiring workers, indicating to investors that the company now needs more workers to meet higher-than-expected demand for burgers and shakes. The market took the rehiring as an indication of stronger demand and a move closer to sales growth some time in 2020. The stock rose 3% in post-market trading after the earnings report.

Given all this, if companies are rehiring workers, it's not necessarily bad news that they're spending the extra money. It could mean they're hopeful about the future—and the growth of the stock.

To see how to manage your stocks on this type of news, watch the quick video above. 

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