The New Chicken and Egg Conundrum: Jobs or Profits?

Chicken or the egg?
Chicken or the egg?

Does hiring workers lead to more profits? Or is it profits that lead to hiring?

That's the investing version of the eternal "Which came first, the chicken or the egg?" debate. But while scientists still grapple with their conundrum, investors can get a pretty definitive answer to the overarching question: Do I want to own companies that are hiring or firing workers?

Wall Street Loves Layoffs

During good times, most people don't think too much about the pink-slip profit conundrum. But go back to 2008 and 2009, when corporations were shedding jobs faster than we could count, and it was a different story.

Back then, analysts were chastising companies that didn't cut fast enough, no one knew if growth companies would keep growing, and very few companies didn't shed at least a few jobs.

We may be seeing a repeat performance now, with layoffs announced at Cisco (CSCO), HSBC (HBC), and even Campbell Soup (CPB). But is that a sign these companies are cutting the fat, or that they'll stop growing profits?

Gallery: IN PHOTOS: Companies Facing Layoffs

Companies facing lay offs
Companies facing lay offs

By the Numbers: The Effect of Pink Slips on Profits

Exactly what kind of payoff do investors get when companies fire workers?

During the period that spans the depths of the recession -- when both profits and stock performance swung wildly -- the companies that cut the most jobs didn't fare too well.

In the table below are six companies that laid off the most workers during the height of the recession, according to's Layoff Tracker. Next to each is the company's stock performance over the last three years and the change in trailing 12-month profits over the past three years.


Number of Layoffs

3-Year Average Annualized Stock Performance

3-Year Average Annualized Profit Change

General Motors*




Caterpillar (CAT)




Verizon (VZ)




Pfizer (PFE)




Merck (MRK)




Emerson Electric (EMR)




Source: Yahoo! Finance. *GM numbers are for Motors Liquidation Company, the survivor of the pre-bankruptcy GM. **Stock performance and profit change averages do not include General Motors. NA = not available.

As you can see, investors weren't exactly rewarded for massive layoffs these companies made. Also consider that the company with the largest number of layoffs -- General Motors -- even had to go to the government with its pockets turned out before heading through bankruptcy.

So what happened to the companies that hired the most during the recession?

Are You Crazy? You're Hiring in a Downturn?

Below is a list of five public companies that made CNN Money's "They're hiring!" list in both January 2009 and January 2010. (To keep me from cherry picking companies to prove a point, the results are limited to companies that invested throughout the recession.)

The job openings may not be impressive compared with the layoffs above, but consider that January 2009 was the depth of the recession. Again, look at the stock and profit performance over the same three-year span we used above.


Job Openings in January 2009

3-Year Average Annualized Stock Performance

3-Year Average Annualized Profit Change

Whole Foods Market (WFM)




Google (GOOG)




Cisco (CSCO)








NA = not available; Genentech was acquired by Roche on March 26, 2009.

Sponsored Links

It isn't hard to see that profit growth is wildly higher at companies hiring during the recession. Stock performance is also significantly better on average. The one exception of course is Cisco, who just announced 6,500 job cuts. Ironic?

So if companies hiring in the middle of a recession not only generate more profit growth but also better stock performance, who would you want to invest with?

I'll Invest with the Egg, Thank You Very Much.

Planting the seeds of growth when times are tough has to be hard, but it has paid off more than cutting to make an organization leaner.

So the next time a company announces layoffs in the middle of a recession, consider what it will mean for its long-term prospects. There will be fewer workers to develop products, make products, and sell products. And eventually that's going to trickle down to the bottom line.

Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Whole Foods Market and Google. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Whole Foods, Pfizer, Google, Cisco, and Emerson Electric.