Earnings & Reactions

Monday down. Tuesday up. Wednesday down.

It may seem there is no rhyme or reason to the market, but
very often, there is. It is just on the counter-intuitive side.

The key to tracking earnings reports — and the way a stock
will trade afterwards — is the expectations for the company. Not your
expectations, but rather, the collective anticipation for a company’s reports.

That’s only the first step. Consider the stock’s prior
action. Some of the results may be anticipated well in advance of the conference
call.

Consider:

HP
IBM
Intel
Yahoo!
Apple

We won’t discuss Citibank or Kodak, both of which simply
disappointed. They missed revenue or earnings numbers or both, and simply got punished for it.

But let’s look at a few others: Why were IBM, Apple and
Intel’s better than expected numbers greeted so differently?

Let’s look at each:

IBM has been a serial disappointer, missing estimates
(warning: memory dump!) something like 8 of the past 11 quarters. When they actually beat, very few were
expecting it. The chart, however, suggests someone knew – the stock was flat
from the May lows, but rallied smartly the 2 weeks before earnings.

Yahoo is the polar opposite of IBM – a regular beat by a
penny outfit. When their earnings came in line with consensus, the reaction was
WHACK. No one likes to pay a 50 P/E for merely meeting consensus.

Rational? No. Understandable? Completely.

Then there’s HP. Its apparent that the good news was already baked in.

HP’s stock had a nice run on the announcement that Mark Hurd
was replacing Carly Fioina. The expectation became built in that would
reorganize the firm, cutting costs and slashing jobs. The stock rallied on his
appointment — but yawned on the actual announcement. The share price reflected
the re-org long before it was officially announced.

Similarly, see Intel’s report and subsequent stock action.
The robust sale of Laptops, especially in Asia, has been a bright spot for PC
makers. But this was widely known. Intel’s mid quarter conference call might
have set up investors to expect too much.

Finally, have a look at Apple. The expectations were that
iMac sales would slow in anticipation of a transition to Intel Chips; There was
also chatter about iPod sales being saturated.

All wrong:

These stocks demonstrate that owning (or trading) stocks during
quarterly reporting are very dependent upon 2 key elements: recent action in the stock,
and the consensus expectations for the company.