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Ask TheStreet: Great Earnings, No Price Pop

Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.


A stock I own reported great earnings this morning, but the price hasn't really gone up. After the stock's recent run-up, I assume this is due to some profit-taking. Any thoughts on this scenario?

-- Submitted via Stockpickr Answers

It's hard to make short term assumptions about a stock. Stocks move up and down on any given day for countless reasons. And they usually move the most -- or at least attract the most volume and attention -- when the company announces their quarterly earnings report because that's when they have the eyes of the investing world upon them.

GM (GM), for example, recently announced a first quarter (2008) loss amounting to $5.74 per share, reflecting $2.9 billion in one-time charges. Seems like a loss that big that would be bad news and send the stock plummeting, right? Wrong. Investors sent GM's shares up 9.4% that day because without the one-time charges, GM only lost $350 million (or 62 cents per share), handily beating Wall Street's expectations.

So, as Chuck Berry said, "It goes to show you never can tell."

GM's "one-time items" included a $1.45 billion charge to reflect a change in the value of GM's 49% share in GMAC Financial Services. Ray Young, GM's executive vice president and chief financial officer, said the company revalued its stake because of losses in GMAC's residential mortgage division.

After a company announces earnings, the "Monday morning quarterbacking" begins. It's easy for analysts , traders, talking heads and the like to come up with reasons for a stock's short term move "ex post facto."

For many individual investors, it's comforting to have a reason -- any reason -- as to why a stock moved one way or another in the past. But what you need to understand is how it will move in the future, right?

Here's what happens. If a company announces great earnings and the stock goes down, the so-called "market" may be "saying" that it does not like the company's guidance for the next quarter -- or next year. The market "commentators" may also attribute the drop in the stock -- after what seems like good news -- to be a result of profit-taking.

It's best to avoid that game entirely and think long term.

Some of the things that move stocks on any given day: analyst opinions (yes, they still matter), short covering, earnings, rumors and other news. And of course, stocks move with the broader market every day like a toy sailboat caught in the tide.

Don't chase that boat -- let's call it the good ship "Momentum" -- too far into the ocean and get caught in the undertow.

Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.

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