Trimmer, Slimmer Firms Are Investment-worthy

Nate is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

So, I've been losing weight. A lot of it. There's no particular praise I'm due for this as I had surgery to achieve it. Still, losing 100 pounds is a good thing, no matter how you do it.

But it got me to thinking about companies that are, metaphorically, losing weight as well. Unfortunately, big firms can't lose weight by paying some doctor ten grand and eating yogurt for a million years (trust me, it feels that way). They have to lose their weight by cutting costs. And the most efficient way of doing that is to cut staff.

Not all companies that cut staff do it because they're in trouble. Some do it because it makes business sense to make the move before trouble happens. Those are the companies in which you want to think about investing. Companies that know where they're going and how they're going to get there are the best long-term plays for the small investor.

Here's some information, taken from International Business Times, that show firms that trimmed staff in 2012:

  • Hewlett-Packard (NYSE: HPQ) 29,000 cuts – HP, while still a good tech firm, isn't something I'd be willing to invest in right now. If you have some money ready for a risky play, sure, go ahead. It's been a rough couple of years for HP and the jury's still out on whether Meg Whitman can get the job done.
  • Hostess, Everyone – Do I need to say more. Hostess is done, after years of management chaos and labor issues. Keep an eye peeled for whichever firm snaps up Twinkies and such, though.
  • AMR Corporation 11,000 cuts – AMR holds American Airlines and wanted to cut 14,000 jobs. But things have changed and that number has declined to 11,000. They could be a great buy once they come out trimmer.  Airlines in general had good profits in 2012 and the future holds higher prices and increased fees for basic services, so AMR could be a solid buy for now.
  • Citigroup 11,000 cuts – The banking giant is trimming to increase profitability. I think they're going to do it and it will benefit those smart enough to buy in during the transitional phase.  Increased profitability for Citi combined with a growing economy should make the firm a growth stock in the near term.  Watch out if it gets above 50, though.  That might be a time to reassess.
  • Pepsi (NYSE: PEP) 8,700 cuts – Pepsi has cut jobs to save money and that money is being invested in developing the next generation of products for the beverage and snack behemoth. It's hard to bet against them, even if they're still chasing Coca-Cola.  Pepsi is a clear #2 in the market, and not a strong one.  The firm's signature product, Pepsi, comes in behind Coke and Diet Coke.  CEO Indra Nooyi says she wants to 'snackify beverages' by leveraging the firm's snack products such as Fritos.  I don't know what that means except an aggressive company trying to catch up to the leader.
  • Procter & Gamble (NYSE: PG) 5,700 to 12,000 cuts – Keep an eye peeled. P&G is up in the air on how many cuts it'll make, but notice that the company keeps emphasizing that it will cut 'non manufacturing' jobs. That'll be management and admin. P&G is cutting overhead so that its products will get out the door cheaper and lead to more profit.  Another good move by P&G?  Combining their research staff into fewer locations is intended to both save money (good) and speed up development of new products (better).
  • J.C. Penney 5,500 cuts – Not one I'd buy right now. J.C. Penney is trailing other mid-range stores like Kohl's and Macy's, but is also being killed as people switch to cheaper alternatives: Think Walmart and Target. The quality's not that different at the discount places, but the savings are.  In year five of a shaky economy, even those with money to spend aren't going to spend it at a mid-line place.  They'll either spend at top end retailers or head for the cheapest.
  • Morgan Stanley (NYSE: MS) More than 4,000 cuts – Another bank suffering from post-recession indigestion, MS will be about 7% lighter at the end of 2012 than at the beginning. It's an attempt to remain in the black, which implies that they are in the black. I'm leery of committing to them. The recent botching of the Facebook IPO and continued troubles at home have damaged the firm's brand on the street.  Others may like them, and I'm not saying I'm down on them, but I'd hold off until they get another quarter or two of good news cycles.
  • Metlife (NYSE: MET) 4,300 cuts – In my time in the finance industry I used Metlife as a goto spot for my clients's insurance needs. It's a good firm with good numbers. It's getting out of the home mortage industry, perhaps having learned a lesson from the housing boom and bust.  There's another housing boom and bust coming, and I think the execs at MetLife know it and want to protect their shareholders (and themselves) from it.
  • Google 4,000 cuts – This is a tricky one to look at. Google's a high flyer, heaven knows, but the cuts are coming not from the search engine, but from the recently acquired (and having trouble) Motorola Mobility. If you have faith that Google knows what it's doing then stick with them.

Look, I know that each of these cuts I've mentioned here have a real, human cost to them. No one likes to hear about people losing their jobs or companies going under. But sometimes what a firm has to do is take the medicine to prevent even further pain later on. That's what most of these firms are doing.

Even Hostess, though it's going away, will leads to some more employment somewhere. If I know anything, it's that people are going to eat Twinkies and Ding Dongs. That means some firm, somewhere, will pick them up and get busy making them.

Just keep them away from me. I'm still trying to lose weight. But in a good way.


Nate Wooley has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , Google, and PepsiCo. Motley Fool newsletter services recommend Google, The Coca-Cola Company, PepsiCo, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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