Sometimes, good news will be announced for a company and the stock will go down. Even more common is an earnings report that seemingly is a good one and beats analysts estimates only to see the stock go down after hours and the next day. What is going on here? Shouldn’t it be the other way around?
Is The Good News Already Known?
Common sense tell you that after good news or a good earnings report is announced, a stock’s price should go up. But what really matters is whether that good news is expected and already known.
The stock market operates in a forward looking manner. All investors are always looking to the future, trying to figure out what a company will do months and years from now. So, if the good news or earnings is already widely expected by investors, then the announcement of it really isn’t something that groundbreaking. Chances are that the stock price has already risen in anticipation of that good event.
A stock price will go up when news or good earnings are NOT expected. Something totally out of the blue and a complete surprise is what makes a stock pop. Most common are big earnings surprises when a company handily beats all the estimates. THAT is unexpected and can propel a stock up.
The Details Of Good Earnings Are What Matter
Even if a company announces earnings that beat estimates, there is no guarantee the stock price will go up. After earnings are announced, companies usually have a conference call where they talk to the media and analysts about the numbers. It is in those calls where the details are revealed and often forward looking projections are made. THOSE are the items that can move a stock.
A recent example was the Facebook earnings announced on October 30, 2013. While they handily beat estimates and showed that they were figuring out how to profit from mobile search, the stock immediately went up after hours and then did a u-turn back down. The stock was under pressure and declined for a good 10 days and the main reason was because of something that was said during the earnings conference call. Facebook admitted that younger users, especially teens, were not using the service as much as they used to. This scared investors and ultimately trumped the fact that earnings were great.
Investors Are Only Interested In The Future
The one concept that you MUST understand about stock investing is that investors only care about the future. That is the ONLY reason, rational or not, that Amazon stock has gone up for years with little to no profits to speak of. Investors are betting that Amazon is building a sales platform empire that will be impossible to beat. They are willing to continue to drive the stock up based on Amazon’s goals and vision for the future.
So, when stocks go down on god news or a good earnings report, you now know that it has something to do with the details and/or whether that information has been expected. Things that are expected are in the past, things that are unexpected point toward the future.