Tuesday, May 1, 2012

Earnings Period Volatility

As earnings season continues, the volatility in specific names continues.

Looking at the broad market, the S&P has been stuck between 1350 and 1400 for some time now, but we've had some pretty large moves in individual names. During these earnings period weeks, its important to not act too quickly, as often you will end up regretting it later.

For example, let's take everyone's beloved Apple (AAPL). Apple reported stellar numbers after the close on April 24. The stock proceeded to open $50 or about 10% higher the next day. If you had bought Apple on the pop on April 25th, you'd be down about 5% as of today.

Apple in particular is dangerous here, because from a technical sense, the stock is broken. While the valuation of the stock is not excessive by any means, the stock simply feels tired. The day to day price action on Apple feels very weak. On broad up days, the stock tries to rally and fizzles. On down days, Apple often ends up closing near its day's lows. This is evidence of a weakening stock. I'm not saying Apple will crash here, but that a correction is underway, and even a great earnings did not stop the correction from continuing.

Let's take a look at another example. Netflix reported after the bell on April 23rd. Their quarter compared with estimates wasn't that good or particularly bad, but their guidance was lousy. Netflix continues to see slowing net subscriber additions. Its efforts to expand into Latin America and United Kingdom are causing it to report continued quarterly losses. They're also not growing their streaming subs as much as people thought, and losing more DVD customers than people thought.

The stock opened down about 15%. Some people bought into it on day 1 after earnings, hoping to play an oversold bounce. Since then the stock has lost another 6-10%, depending on when you bought on the day after earnings. Netflix is an example of trying to catch a falling knife during earnings season. The interesting thing with trying to catch falling knives - sooner or later, you will get your hands sliced open.

As we continue to roll thru earnings season, it is very important to remember to digest the information presented to you, before taking action. Great earnings are often disguised by a mediocre headline EPS or revenue number. Decent earnings often disguise deteriorating underlying fundamentals. Before you buy any stock during earnings season, always listen to the conference call!

1 comment:

  1. Ho hum, looks like my other post didn't go through the other day here. I really don't know why I gotten myself so deep in Apple. I was watching it for the longest time and decided to buy at its 52 week high, at first, it was doing well until of recent weeks. I absolutely hate selling at a loss, so I'll hold most likely till end of the year where Apple will pay out a dividend and share buyback hopefully with a new release of Iphone5 in the works. But ya, I bought into the hype and paying for it now. Do you think the market is in a slump after today's downturn?