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 AnswersIt'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.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV