WHY STOCKS GO DOWN AFTER GOOD EARNINGS REPORTS
Its true: after good company earnings reports, the stock price of a company often goes down! This is very confusing to anyone trying to learn how to buy stocks and figure out what in the world is going on in the stock market. As an example, I will use Apple (APPL) stock which just reported earnings last night on 10/18/2010.
So, yesterday after the market’s close, Apple announced earnings. You can see a quick summary of the earnings here which overall were very good and were all time records for the company in many areas. It seems these are very good times for Apple and the stock price has been steadily going up all of October as you can see below!
People get excited about earnings when you have a very hot company with popular products like Apple has. In the past, companies like Dell, Microsoft, Google, and Starbucks have all experience similar high profiles and gotten investors very hyped up at earnings time. People can’t wait to buy stock of companies like that.
You can see that Apple stock had run up nicely before earnings and especially so a day or two before they were announced. Not wanting to miss out on anything, people bid the stock up in anticipation of the earnings report just in case the earnings were spectacular. This kind of run up happens when the word on the street is all positive and people listen to analysts recommending the stock and giving future predictions of target prices much higher than the price of the stock now.
That brings us to why a stock price might go down the next day after it had great earnings.
The earnings date and run up of the stock of some of these highly publicized companies like Apple is almost like Christmas. Remember when you were young and the anticipation of Christmas was almost unbearable? What were you going to get? How can I ever wait that long? I think I am going to die I am so excited!
Once Christmas morning did finally arrive it was often just as good as you dreamed (depending on what Santa brought) but soon after, the thrill started to wear off. Once Christmas morning arrives, all the fantasy is gone and the anticipation is deflated. You then know what you got and there is nothing left to dream about.
It is similar with company stock earnings. People sometimes build up an earnings report so high in their imagination that the real thing can’t quite live up to the fantasy. Even if the real earnings report is quite good, like Apple’s was, it still can fall just a little short of the lofty expectations.
But even though Apple blew out most of the numbers this past quarter, it seems like they shipped fewer iPads than some analysts had predicted and that is what people are keying on today. The demand was there to sell more of them but they were unable to produce them fast enough.
This one bit of not spectacular news was enough to send Apple stock down in after hours trading and down today. It didn’t help that the whole market was down but the thing to be learned is that everyone had such high expectations, that one little bit of bad news is enough to send the stock down. People had bid the price up so high that nothing but total perfection could make it go higher.
The only way people would want to buy stock in Apple today and make it go to new highs was if that earnings report was perfect and even better than anyone could have imagined. The stock price can only go up so far so fast and any teeny bump in the rode was enough to make some people want to sell.
