Eye on the Exit: Why Layoffs Could Signal Potential Trouble for the Company in your portfolio

Max Teh
Aug 24, 2024
3 min read

Updated: May 25

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

KEYPOINTS

🔑 Understanding a company's workforce trends can reveal hidden risks and opportunities for your portfolio.

🔑 Ruthless layoffs, especially at companies with weak fundamentals and poor culture, can signal trouble ahead for future growth.

🔑 Pay attention to how a company treats its employees. A strong company culture and workforce engagement can be indicators of long-term success.

Building a winning stock portfolio goes beyond just price charts and company names. Today, we'll delve into a crucial factor often overlooked: employee trends. Specifically, we'll explore why layoffs, especially ruthless ones, can be a red flag for a company's future growth potential.

Why layoffs matter:

Imagine a company facing challenges, but with strong underlying fundamentals (think financials) and a positive company culture (think happy, engaged employees). Even during layoffs, the impact might be minimal.

And if the company is growing, while meeting the checklists of all the above (stong fundamentals and positive company culture), reducing number of employees to improve profitability can be a good sign.

However, the red flags start waving when layoffs coincide with weak fundamentals and a poor company culture (as evidenced by low Glassdoor ratings). Here's why:

Talent drain: Layoffs, particularly brutal ones, make it difficult to retain top talent. Who wants to stay at a company where job security seems shaky?
Knowledge gaps: Losing experienced employees creates knowledge gaps. New hires take time to adjust, hindering progress, especially in technical fields like engineering.
Morale plummets: Fear of job cuts can severely impact existing employees' morale, leading to decreased productivity and innovation.

This becomes particularly concerning in innovative industries where cutting-edge skills are vital. Take Tesla's recent layoffs as a case study.

Tesla's Exodus:

Tesla, known for pushing boundaries in electric vehicles (EVs) and artificial intelligence (AI), relies heavily on talented engineers. Yet, they implemented significant layoffs. This triggered an exodus of key personnel, including:

Executive departures: Vice Presidents, Senior VPs, and long-time employees left, potentially due to concerns about Tesla's future or dissatisfaction with the layoff approach.

The amount of key execs which left Tesla voluntarily in this year alone is concerning & signal potential problems within the organisation. — The amount of key execs which left Tesla voluntarily in the past 2 years alone is concerning & signal potential problems within the organisation not to be taken lightly by investors.

Impact on innovation: With these key departures, Tesla loses valuable institutional knowledge and experience. New hires will take time to fill the gap, potentially hindering their ambitious goals.

The takeaway:

Favor companies with a growing workforce: This generally indicates a healthy and expanding business.

Axon's no. of employees have been increasing steadily in the past 10 years.

You can obtain these info through sites like
1. Simplywall.st > Search for company > Other information > Number of Employees
  1. preferably since they update the figures every quarter
  2. however on the free-tier account there is a limit of 5 companies view per day, alternatively you can use other sites like:
2. Stock Analysis > Search for company > Profile > Employees
3. Macrotrends.net > Search for company > Other metrics > Employee Count

Research layoffs: Look beyond headline numbers. Use Google searches like "[Company name] + layoffs" to find news articles that detail the context and reasons behind recent layoffs.

Consider company culture: Glassdoor ratings offer valuable insights into employee satisfaction. A strong rating suggests a company that prioritizes its workforce, even during challenging times.

Axon's satisfactory Glassdoor ratings combined with their increasing no. of employees with no layoff news is a good sign for investors.

Remember:

Layoffs alone aren't necessarily a dealbreaker.

But when coupled with weak fundamentals and a poor company culture, they can be a strong signal for potential trouble down the road. By keeping an eye on employee trends, you can make informed investment decisions and build a stronger, more resilient portfolio.