Illogical Trends of Friday Might Create Value … or Value Traps!

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

Earnings create movement and set the trend for a stock for the following three months. A stock can post a blowout quarter and see great movement and a shift from pessimism to optimism (i.e. Netflix) or vise versa. But sometimes, the market gets it wrong and the stock trends in an incorrect direction. Sometimes it creates value and other times it creates a value trap. With that being said, let’s look at the three most obvious cases on Thursday.

Social Media Stock Pops on Great Earnings ... But Great Earnings Should’ve Been Expected!

Social media company LinkedIn (NYSE: LNKD) posted an incredible quarter and then traded higher by over 21% on Friday. The company posted an EPS of $0.35, which was $0.16 better than the consensus. The company also posted revenue of $303.6 million, representing a year-over-year (yoy) gain of 81% and $24.1 million better than the consensus.

LinkedIn continues to prove that it has one of the most efficient business models in the social media space. The company grew its Talent Solutions (jobs) segment by 90% yoy, which contributes 53% of total sales. It also grew registered users by 15 million over the last quarter to over 200 million!

When you look at LinkedIn’s quarter it is incredible by all measures, no doubt! However, it should be incredible -- this is a stock trading with price/sales of almost 16 and a forward P/E ratio over 70. The company is by far the most expensive of any social media company in the market, with a market cap of $16.2 billion. This means that each user is valued at more than $81.

The market’s $81 per user valuation for LinkedIn is $17 more than Facebook and while Facebook has diversification, LinkedIn is primarily a jobs-based company. Therefore, I don’t see how much larger LinkedIn could become with a jobs-focused platform. And compared to other companies in technology, it would need $4 billion in sales just to be fairly valued on a price/sales basis. I don’t think it will ever reach these levels, therefore long-term, it’s a value trap, although it could go higher short-term.

Rating Firm Falls… But Why?

I’m not a big fan of ratings firm Moody’s (NYSE: MCO), and I believe that if by some chance that the DOJ does continue its pursuit of Standard & Poors that Moody’s would have to be dragged into the equation. However, the company posted an incredibly strong quarter, especially when you consider its 9% stock loss that followed.

The company posted an EPS of $0.70, $0.02 better than consensus, and $754.2 million in revenue, a 33% yoy beat, and $71 million better than expectations. Furthermore, the company announced adjusted operating margins of 46%-47%. Perhaps this falls was due to a report from Attorney General Eric Schneiderman that he is investigating other rating firms? Honestly, I don’t know why it’s falling; the stock rose in premarket and is not overvalued by any measure. Therefore, it might be wise to explore the stock as a potential investment.

Decent Quarter, Horrible Reaction

SunPower (NASDAQ: SPWR) fell by 7% on Friday after posting fairly strong earnings. The company posted an EPS of $0.18, a beat of $0.03, and revenue of $784 million, which also exceeded expectations. The company issued guidance, saying it expects profitability in Q1; analysts were expecting a loss. However, revenue guidance was weak, anywhere from $2 million-$75 million below the consensus, which is a large margin for error.

With an earnings report such as this, I would understand if SunPower was trading flat, or maybe even a little lower. However, to lose 7% of its value suggests a very weak fundamental performance, and that was not the case.  With all things considered, the earnings were strong; the company saw a 460 basis point rise in gross margins and is expecting a 10% drop in OPEX this year. Therefore, earnings should be significantly greater to complement its price/sales of 0.43. As a result, this might be a stock worth watching.

Conclusion

A stock’s performance after earnings does not necessarily mean that a company posted a good, or a bad, quarter. Too often we associate stock performance with fundamental performance, yet it’s the inconsistencies between these two factors that create value. The ability to identify these inconsistencies is a psychological behavior-changing skill that very few investors are able to perfect. In the past, I have talked about this subject in great detail, and have taught investors how to change these tendencies to return large gains. My advice is to become a smart investor, by learning how to read quarterly reports and assess the quarter without looking at stock performance. Then, if a stock trades incorrectly you are better able to capitalize on the value.


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Moody's. The Motley Fool owns shares of LinkedIn. 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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