When Stocks Don't Respond to Earnings, Good or Bad

McDonald’s (MCD) beats street estimates, posting a 3.5% gain in earnings and a stellar 4.3% gain in same-store sales. So would you expect the stock to lose two percent at the opening bell? Not.

Micky D’s recovered from its opening-bell decline, and even posted a modest gain through the day yesterday, while other companies, like AT&T (T) – which also reported good earnings – are up slightly. But sometimes, even though companies have good news, nothing happens – or they even take an earnings-day hit. And if it’s bad news, well, then reach for the sky. So what’s the deal?

It’s a bit like life with your significant other – you surprise him, good or bad, and he doesn’t always react the way you’d expect. Do something bad, and he can be sympathetic and forgiving. Or he just sends you right to the doghouse. Or, do something good and sometimes he doesn’t even notice.

Markets can be just as hard to figure out. Like relationships, it’s all about expectations – about what was “supposed” to happen, especially down the road. If you’re generally a pretty good partner, then your “other” may forgive you for a small slip up because they know you won’t do it again. Or if you perpetually forget their birthday, even the biggest bouquet of flowers won’t suddenly make everything all better.

And so it is with companies. Investors care more about the company’s long-term intentions than immediate gratification. So when I see a stock act contrary to what the news would suggest, that’s when I take notice.

Perhaps because they are being watched so closely – and talked about whether here at SeekingAlpha, WeSeed, or elsewhere -- companies seem to be behaving as expected this earnings season. A few recent examples:

• McDonalds (NYSE:MCD) – Strong same store sales (4.3% growth worldwide, 4.7% U.S.) sounded great, but revenues were actually off for the quarter, because of unfavorable currency translation. Or perhaps new stores weren’t performing so well? Look at the menu closely before placing your order.

• Bank of America (NYSE:BAC) – The poster child for this earning season is not fooling everyone with their big bouquet of earnings roses. They earned $4.2 billion, handily beating estimates. Yet on Monday, investors took their stock apart some 24%, leading to a 250 point Dow decline. With $13.4 billion in loan loss reserves set aside and not much trust in their business to begin with -- BAC’s in the doghouse. And with those numbers floating out there, even a room full of roses won’t patch things up with investors.

• Intel (NASDAQ:INTC) -- Last week, the chip giant reported earnings of 11 cents against expectations of 3 cents. Sounded good, but it was off to the woodshed for INTC thanks to a 4.3% loss the following day. Revenue was way down (a good news/bad news story -- the company still beat earnings, so costs must be under control, right?). But they’re still pretty worried: their statement that “…there was still too much market and economic turbulence to give a precise projection for second quarter revenue” spooked investors.

• Mattel (NYSE:MAT) -- Here’s one to toy around with -- Mattel reported dismal results: a 6 percent sales drop overall and a 23 percent drop overseas and a larger loss than expected. Yet the stock was up 43 cents or 3.4%! Who’s playing with whom? Turns out the market was more focused on new toy lines for next year based on WWE, Thomas & Friends, and the now-resolved Bratz conflict.

• Southwest Airlines (NYSE:LUV) -- Finally, that bouquet might bring an initial scowl, but sometimes there’s a truer meaning. Last Thursday the carrier reported a surprisingly large loss with a traffic drop the CEO called “the carrier's toughest revenue environment ever.” But in the next few days -- even in a tough market -- it was “kiss and make up” as the stock went from $7.20 before the announcement to $6.88 and is now back over $7.50. A sign of “true LUV” for this excellent company.

You can’t read too much into a dozen roses, and you can’t read too much into a toilet seat left up for the umpteenth time. Markets are about feelings, and feelings run deeper than that. Deep down you might find a story better -- or worse -- than expected.

Comments

[tziv:]

I know she is a celbrity, but c'mon. where is the value in this article. Also I guess I am to undersatnd that she owns all the stocks she talks about as she has no disclaimer. I expect a bit more from SA.

Apr 30 09:05 AM