When it comes to the economy, layoffs are bad. When it comes to a company undergoing layoffs, the result can be a bit more mixed. A company may need to streamline to improve profitability, or simply over-hired during a boom. Or it could be in a long-term decline.
Investors who can determine what a company’s layoffs mean may stand to profit. And the market’s initial reaction to layoffs can generally give a hint as to what happens next.
For instance, investors cheered the latest layoff announcement of up to 20,000 workers from United Parcel Service (UPS).
That reflects lower demand for physical goods, and increased automation. While the tariff and trade issue still overhangs the company, the move indicates a push to keep costs down.
In the meantime, shares trade at 13 times earnings, and UPS is a leader in the oligopoly parcel delivery space. Reducing headcount could increase profitability amid the current trade uncertainty.
Action to take: Long-term investors may like shares here, near their 52-week lows but now trending higher.
At current prices, UPS also pays a hefty 6.7% dividend. That dividend currently exceeds earnings, so investors should be mindful of a potential cut.
For traders, the September $105 calls, last trading for about $3.50, could see mid-to-high double-digit returns on a further move higher in shares in the months ahead. Traders could look to take quick profits on any jump from favorable tariff and trade news.
Disclosure: The author of this article has no position in the company mentioned here, but may further trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.