It seems like every quarter, this sub has a number of posts about how stocks behave in a strange manner around earnings reports. It is unfortunately a lot more nuanced than just "XYZ Company blew away EPS expectations by 200%, so why is it down 10% post-market?"
If you see a stock with a seemingly unexpected response to positive (or even negative) earnings, there are a few key factors to check:
Are earnings priced in beforehand? What has happened over the trading sessions prior to earnings releases? It is very possible that investors have positioned themselves into companies reporting earnings, so you might see a small pop, no pop at all, or even some downward movement as those investors go into profit-taking mode.
Are you looking at key metrics other than EPS? EPS is great and all, but what else has the company done, and is it a sign of strength or weakness? A key metric that I point out a lot is subscribers for Netflix, but you can find this pretty easily by thinking about the industry or sector that the company fits into. Did Ford increase deliveries of F-150s (its bread and butter/high margin vehicle) YoY/QoQ? Did Boeing land and fulfill that snazzy new contract to deliver planes to Delta? How are Teva's generic prescription sales? Make sure to also look at competitors for their relative performance, and to see how market share has shifted or been redistributed.
Liquidity fade affecting institutional investors I used to work at a fund that ran a pre/post-market strategy to take advantage of earnings reports and other news releases. We did get burned on a couple of occasions where we were able to build sizable positions pretty quickly, only to see the opposite side of the book fade away when it was time to exit. We would then have to choose whether to take a bath and close out, or hedge up and maintain exposure overnight. We often flattened our positions to avoid holding overnight risk, but we would be fighting other traders who were also exiting, amplifying the pullback/reversal. What was originally a big pop was later reduced to a small blip, because the liquidity thinned out.
I'll edit this post if any other major factors come to mind, but just know that there are rational explanations behind movements that, on first glance, appear irrational.
Submitted January 31, 2018 at 05:32PM by jn062181 http://ift.tt/2nvIBks
