Not all bad news is created equal. Patient and savvy long-term investors can leverage short-term setbacks into long-term winnings by realizing that the most likely outcome of a so-called disaster is not nearly as bad as the market assumes. However, some kinds of bad news are so toxic that prudent investors simply stay away entirely. How then should investors separate the "bad news in wolf's clothing" from the real bad news? Here are five key factors that may indicate when bad PR is too serious to ignore.
When the Company Causes Death
When a company's missteps result in actual deaths, there is a virtually inevitable spiral of events - none of which are positive. Not only will the news likely be full of warnings about the dangerous product/service, but follow-up stories detailing the aftermath and fallout will keep the mistake (and its perpetrators) in people's consciousness. Afterwards, there are expensive lawsuits and settlements, recovery and mitigation efforts, and press campaigns designed to make consumers forget about the incident.
Indevus Pharmaceuticals (known at the time as Interneuron) thought it had a blockbuster with the weight-loss drug Redux - that was until severe side-effects led to numerous product liability suits and the FDA ordered withdrawal from the market. All told, Wyeth, which licensed the drug from Indevus, paid out more than $20 billion in legal settlements to those who took Redux or Pondimin (another Wyeth weight loss drug), while revenue of the two drugs topped out at about $300 million in 1996.
http://financialedge.investopedia.com/financial-edge/0810/5-Warning-Signs-For-Bad-PR-Stocks.aspx
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