The future of the company is now very much in question as investors grapple with the aftermath of the disclosure.
Many companies in similar situations didn’t survive.
It’s hard to believe a huge company like Volkswagen could pull a stunt like this, but should we be surprised?
Greed is a powerful motivator and competition for the almighty dollar is fierce. Skirting the rules is as much a part of capitalism as anything else.
Just don’t go too far. And for sure, don’t get caught.
Here are some companies that could experience something major… in a catastrophic way.
At the same time the Volkswagen story was breaking, the former CEO of a peanut processing company awaited his fate for his role in running a shoddy operation that allowed tainted food to ship to customers.
Stewart Parnell of the now-defunct Peanut Corporation received a sentence of 28 years in prison, effectively putting him in jail for the remainder of his life.
Cut down by two thirds, the survival of Lumber Liquidators is still in question.
Investors must understand that corporate misdeeds are a very real risk to shareholder value.
What companies could experience Volkswagen-like shenanigans?
This is mere speculation, mind you, but there are several companies where potential debacles like Volkswagen’s could rear their ugly heads out of the blue.
As such, pricing in the risk of such events should be taking place, yet clearly no such potential fraud discount exists.
At a minimum, keep your eyes wide open with these five companies. They may not be as pristine as they appear…
Beware of These 5 Companies’ Potential Troubles: Coca-Cola (KO)
The health risks from drinking high-sugar beverages like Coke are well known.
What if those risks are worse than we suspect?
What if the company already knows about those risks?
Just like the cigarette companies researched the impact of certain chemicals in their products, we now know that Coca-Cola (KO) has invested heavily in researching the health impact of its beverages.
Is it reasonable to assume that the company would fully disclose any new developments that, if revealed, might ultimately harm the company?
It’s not that far fetched.
The potential of an unforeseen scandal hitting Coca-Cola needs to be priced into the stock.
A 10% discount seems fair in this market.
Beware of These 5 Companies’ Potential Troubles: Toll Brothers (TOL)
The homebuilding sector has been one of the few shining stars in this tepid growth environment.
Low interest rates have resulted in a building spree. Still, prices are such that profits are harder to come by.
The race to profits may cause a builder to cut corners.
For Toll Brothers (TOL) , the pressure must be great. Luxury homes are tough to sell in a barely-growing economy.
The company is to be commended for moving somewhat downstream, but what percent of its soul did it have to sell in order to be able to compete effectively in that space?
Who knows. Thinner wood here, a couple fewer screws there and you might have real problems.
Obviously, none exist today, but we are exploring possibilities that should be priced into shares.
For Toll, the company trades at a healthy premium to book value. If there are misdeeds, that book value could decline hard and fast.
Beware of These 5 Companies’ Potential Troubles: Johnson & Johnson (JNJ)
Remember the Tylenol scare of 1982?
After a series of poisoning deaths resulted from tampered Tylenol capsules laced with potassium cyanide, the news unsurprisingly impacted Johnson & Johnson (JNJ).
The company recovered from that incident following a nationwide recall.
The scare resulted in changes to packaging of many over-the-counter products that could potentially be tampered with.
In the years since, complacency has set in.
What if there were another similar scare?
Would Johnson & Johnson be so fortunate a second time? Probably not. Even worse, what happens if there is a flaw in their manufacturing process?
These are all risks that investors need to consider before owning a stock like Johnson & Johnson.
Beware of These 5 Companies’ Potential Troubles: Chipotle (CMG)
If you’re around long enough, you see it all. Nothing surprises, not even corporate malfeasance.
Problems can arise out of nowhere. You just never know. If you’re looking for shadows on the wall, look everywhere.
Chipotle (CMG) has become a giant in the restaurant business, thanks to its simple, fast-casual menu of natural ingredients.
The explosive growth of the company leaves it vulnerable to making mistakes. Thus far, management has done things the right way.
Recently, the company removed pork from its menu due to supply issues.
Could pressure result in a different path?
For now, we trust that Chipotle will give us nothing put the natural products they promise, but a huge stock valuation and demands from investors might cause a different result.
Never underestimate temptation. One undercover investigation that uncovers unsavory practices with the food supply and the air comes out of the bubble.
That should definitely be factored into any investment decision of Chipotle.
Beware of These 5 Companies’ Potential Troubles: Alibaba (BABA)
When Alibaba (BABA) went public a year ago, the company was a Wall Street darling.
Many turned a blind eye to a company that may be pulling the wool over investors’ eyes.
The stock is tanking and under attack. A recent Barron’s article suggests Alibaba might fall another 50%.
The company took exception and issued a scathing analysis countering many of the article’s assertions.
When a company so vehemently argues a dissenting opinion, there might be more to it than meets the eye.
The odds of something untoward happening at Alibaba is quite low, but the risk and possibility of something happening is quite real.
At some price, that risk is worth taking, but probably not at current levels.
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This post originally appeared in mainstreetinvestor.com.
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