Three Stocks With Misleading Post-Earning Reactions

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Big moves after earnings are nothing new. A strong or bad earnings report can set the trend of a stock for the following three months. However, there are times when the market messes up, or completely misjudges a stock. This can create value or sometimes can give a company too high of a value, creating a trap. Therefore, with Thursday being such a major day for earnings, I am looking at three misleading reactions following earnings reports.

Apple (NASDAQ: AAPL)

Let’s start with the biggest news of the day, Apple’s 12.32% decline after Q4 earnings. By now the company’s quarter has been assessed, dissected, and discussed on virtually every level, as the Yahoo! finance feed shows an article being published every other minute in regards to Apple. And although the opinions are mixed, the consensus for the reason that it fell is that people believe earnings growth is slowing.

My biggest question for the last two months has been, “how in the world can a stock lose 25% of its value (now 37%) from highs yet expectations remain the same?” The company sold 47.8 million iPhones, the street was expecting $48 million; revenue was $54.5 billion which was $200 million shy of expectations; and earnings were greater than expectations; so therefore what created the loss?

Overall, it was a great quarter with 26.7% top-line growth adjusted for the extra week in the quarter. With that being said, I am not sure what the market wants from a company this large with a single digit forward P/E ratio. It’s a simple fact that as a company grows larger year-over-year sales will decline. The fact that it’s expecting 20-30% growth as a company with over $155 billion in sales is quite extraordinary. Bottom line: The market got this one wrong, it should have risen 10% on such incredible growth.

Western Digital (NASDAQ: WDC)

For the last six months all I’ve heard about is how weak the PC market was performing and that hard disk drive companies such as Western Digital were going to suffer in 2013. However, Western Digital posted an incredible quarter where it beat on both top and bottom line expectations. The company also guided in-line with expectations and kept gross margin expectations at 28% for the year.

Western Digital traded higher by 1.63% on Thursday after reporting its earnings. Normally, I wouldn’t consider this performance a big deal: However this is a company that grew its revenue by 92% and more than doubled its net income growth. It’s not as if the company trades with some massive valuation and experienced minimum stock movement because expectations were too high: It trades with a forward P/E ratio of 6.0 and a price/sales of 0.75! It’s insanely cheap and should have rallied at least 10% higher after reporting such a blowout quarter.

Microsoft (NASDAQ: MSFT)

Microsoft reported earnings yesterday, and there is still much to be learned as the conference call is still in progress, yet the stock has immediately fallen by 2%. Microsoft had already declined more than 15% during the last 10 months thanks to a sluggish PC industry. But much like Apple, it’s already cheap with a mid-single digit forward earnings ratio minus cash. Therefore, when I saw that Windows division revenue was up 11% year-over-year, adjusted for Windows 8 presales, I was particularly encouraged. The company saw strong growth from its Server & Tools segment and Opex. Therefore, considering all the negativity that has surrounded this company over the last year I am a bit surprised that it traded lower in afterhours, and believe it should be trading quite higher.

Conclusion:

Above, I have given just three examples of high-profile price moves that seem a bit illogical. Of course Microsoft is still to be determined, although the initial reaction is shocking to the say the least. On the other hand, Apple and Western Digital traded with price action that I believe presents clear value. However, additional due diligence is required to determine if one of these stocks might fit into your portfolio. If not, I suggest using this tool and assessing an earnings report without seeing the price action, and you might see that the market trades illogical more often than you might think.


BrianNichols owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Microsoft, and Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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