Anyone come across the "Rule of Three" profit warnings?
If a recent IPO warns on its first quarterly report, it will probably disappoint at the second and the third quarter.
Here's the example of Facebook:
- IPOed at $38 on 18th May 2012
- 2Q results on 31st July 2012, $29 before results, $23 after
- 3Q results on 24th Oct 2012, $20 before results, $22 after
- FY on 1st Feb 2013, $31 before results, $30 after
The logic is pretty simple:
- an IPO is the moment of greatest disclosure of data. Management should be able to clearly articulate the first quarter figures to analysts, and be laser focused on meeting or beating them
- if they can't even get the first quarter figures right, then there is little chance that the first year forecasts of the rosey-eyed brokers at the lead investment banks will be met
- But profit warnings are a bitter pill, so not everyone sells at the first disappointment, some hold on, encouraged by the brokers at the lead investment banks
- Typically, most of the hold-outs sell after the second profit warning
- And the final shoe, the rosey-recommendations and forecasts of the brokers at the lead investment banks, rarely falls until the third quarter, when even the die-hard supporters exit.
Often there's a buying opportunity them :)
So $SNAP see you in 6 months.
aside: the rule of 3, is from my equity research days at Credit Suisse.
Submitted May 11, 2017 at 05:14AM by shane_stockflare http://ift.tt/2pnfdkb
