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Coca-Cola recalled thousands of potentially contaminated cans and investors didn’t blink — could the same scandal sink a smaller business overnight?

Thousands of cans containing Coca-Cola products have been recalled due to potential metal contamination.

The affected Coca-Cola Zero Sugar, Coca-Cola and Sprite cans fell under a Class II recall, which the Food and Drug Administration (FDA) uses to describe products that “may cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote.”

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Recalled products can be identified using the following codes:

According to TODAY, a company spokesperson said that the recalled products were only distributed in Texas, specifically in the Rio Grande Valley and San Antonio, and that all affected products have been removed from store shelves. (1)

It seems in this case the harm done to the public was limited, but product defects are no joke, and can result in serious harm to consumers and companies. So, how will this recall impact Coca-Cola?

What about the stock price?

Whenever a recall of a given product is announced, there’s the risk that it could damage the brand’s reputation and prompt consumers not to buy it. If a bad product causes injury, it could also result in legal action. It’s common for a company’s stock price to fall following negative news of any sort, and a recall fits that category.

The bottling plant that sent out the affected Coca-Cola cans initiated a recall on Oct. 3, and FDA labelled it a Class II recall on Oct. 20. Shares of Coca-Cola remained pretty flat in the days following Oct. 3. The day after the FDA’s classification, shares of Coca-Cola actually rose to their highest level in October at the time. And while they’ve retreated since, as of Oct. 29, they’re pretty much exactly back where they were on Oct. 20.

The fact that a relatively small amount of product was affected, with minimal adverse health risks, likely contributed to this recall quickly blowing over with investors. But not every company is so lucky.

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In 1982, Johnson & Johnson issued a nationwide recall of Tylenol after seven people in the Chicago area died from capsules laced with cyanide. Even though the bottles had been tampered with, and Johnson & Johnson didn’t produce a faulty or dangerous product, the company’s stock price and market share plunged following the news. But according to The New York Times, within two months the painkiller was back on shelves and its stock price and market share had mostly bounced back. (2)

Whether a product recall causes short-term damage versus long-term damage can depend on the circumstances at hand, as well as the reputation of the company. If it’s a large, established business and the circumstances surrounding the recall are fairly minor, then any stock price dip that follows may be temporary. If the recall is more extreme, and more harm is caused, then the damage may be longer term. In the case described above, Johnson & Johnson’s recovery was attributed to its consumer-focused response of widely pulling its product and offering free Tylenol replacements in tablet form — a costly but seemingly worthwhile move.

Should Coca-Cola investors be worried?

If you’re someone who owns shares of Coca-Cola, you may wonder if investors would be rattled by a recall like the one that happened in October. But the reality is that product recalls are fairly common. The FDA, for example, frequently issues dozens of recall notices every month for a variety of reasons. So it’s no surprise a small product recall such as this one didn’t result in panic. The recall also was not a Class I recall, which is considered severe in terms of health consequences, and it only applied to a limited geographic area.

If owning shares of Coca-Cola fits your investing strategy, then you shouldn’t necessarily rush to dump them because of a single incident like this. Over the past five years, Coca-Cola shares are up around 42%. Furthermore, Coca-Cola has consistently raised its dividend for 63 years. (3) The fact that it’s been able to increase its dividend for decades indicates that it’s a stable business with a solid reputation. And a single recall is unlikely to change that.

That said, if you own shares of other companies that end up recalling products of their own, it’s important to pay attention to the specifics of the situation. Coca-Cola is a huge company and well-known brand, so it’s in a strong position to recover easily from a recall situation. A smaller or less well-known company may not have the same recovery, and the same holds true for more extreme recall situations.

It’s important to stay on top of the news when it comes to the stocks you own, and to be mindful of red flag situations. That said, selling after a recall isn’t always smart. Sometimes, stock prices can plunge without much warning, and selling could mean locking in losses. It can pay to wait out a recovery, even if it takes months or even years, especially if the company is otherwise fundamentally sound.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

TODAY (1; The New York Times (2); Coca-Cola (3)

This article originally appeared on Moneywise.com under the title: Coca-Cola recalled potentially contaminated cans. Investors didn’t blink — could the same scandal sink a small business?

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.