What Stock Options Backdating Scandal?
be a non-issue in terms of stock performance. While the practice is illegal and companies that were affected must restate their earnings and pay fines, these stocks have actually performed well given the negative press. For example, Apple (AAPL) is up 22%, Adobe up (ADBE) 15.8%, Applied Micro Circuits (AMCC) up 44.4%, and BEA Systems (BEAS) up 41.6% YTD (Bloomberg Financial, 2006). All these companies have or are currently being investigated by the SEC. As you might have noticed, the bulk of these backdating options companies were in Technology sector as Hi-Tech issue stock options to recruit and retain employees.
One might ask why these stocks are up given the accounting irregularities. The fundamental reason is investors are viewing the unfortunate practice as something that has already occurred, thus having little impact on the future of the company. Companies with sound fundamentals were the least affected because investors believed past irregularities was not enough to negatively impact future growth and profits. Fortunately, since this problem came to light, companies have taken steps to address the issue and putting new measures to prevent such practice from happening in the future. For instance, Apple Inc (AAPL) actually reported itself to the SEC after an internal audit.
While the backdating of options is certainly not good, it is in no way in the same category as the Enron and Worldcom scandal. Smart investors instead took the opportunity to buy when the stock tumbled. Someone once said all opportunities start out looking like a snake; this is one snake that is certainly turning into a great opportunity. The next time you hear about a company being investigated for stock options backdating, look at the company’s fundamentals. If it is sound, consider buying when others panic and share stumbles.
