Post-Earning Reactions: The Market Got it Wrong

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

Earnings and earning-related news is the number one catalyst for stock movement. A strong quarter can dictate the direction of a stock for the following three months as can a bad quarter; in the past I have written in detail about such subjects, a domino effect following a strong or bad quarter. However, sometimes the market gets it wrong, and stocks trend incorrectly. Therefore, I am looking at three big time post earning reactions to determine if the market got it wrong.

Deeper Quarterly Analysis Indicates a Strong Quarter for this Energy Company

Apache Corp. (NYSE: APA) traded lower by 1.5% on Thursday, making its yearly loss 22.5%, after reporting earnings. The company reported an EPS of $2.27, which was short of expectations by $0.06. However, with its revenue of $4.39 billion it beat on the top line by $20 million. Therefore, the quarter was fair based on these two metrics, nothing spectacular, and a 1.5% loss should be appropriate.

Far too often investors look at just the top and bottom line, they don’t take time to read the quarterly report before forming an opinion on the quarter. Therefore, investors might have missed that production reached a new milestone, averaging 800,000 boe per day. The company's operating cash flow increased $110 million over last year and the only reason its bottom line was short of expectations was because of weak oil and gas prices, as oil fell 3.7%. Therefore, we saw lots of positives for a company that is valued at just 8.7 times next year’s earnings. I think that with all things considered, the market got it wrong, and this is a stock that should have traded considerably higher.

We Got What We Expected

On Thursday, General Motors (NYSE: GM) reported what we expected, which included strong sales in the Americas and losses in Europe. The stock lost more than 2.5% of its value after reporting, after missing bottom-line expectations and beating top-line expectations. Both were strong gains over last year as the company posted net income of $900 million compared to $500 million last year and increased revenue by $1.3 billion during the same period.

The company’s $1.4 billion pre-tax profit in the U.S. is not the problem, but rather its $700 million loss in Europe. The good news is that according to Ford, Europe is reaching a bottom. This year will be bad but then after significant cuts and restructuring efforts the region should stabilize. Once again, this is nothing new. We heard this from Ford CEO Allan Mulally back when his company reported earnings, which drug it and GM lower. Therefore, with no surprises, why did GM fall 2.5%?

Honestly, I don’t know. The stock is not expensive -- it trades with a price/sales of 0.30 and a forward ratio of 7.74, so it’s not as if shares were priced for perfection. Over the last month it has pulled back by 8%, and in my opinion, the stock is presenting a great opportunity for investors. The U.S. is growing fast, both South America and Asia are seeing solid growth/expansion, and Europe is near its bottom. Therefore, with an attractive valuation, GM is a stock to buy!

Travel Site Posts Strong Quarter and Investors Take Profits

With a price/sales ratio of 9.13 and a forward P/E ratio of 23.78, I wouldn’t call TripAdvisor (NASDAQ: TRIP) a cheap stock. The company had seen a large increase in value, 35%, since reporting Q3 earnings that beat expectations. Therefore, it’s not uncommon for investors to take profits after a strong run higher. However, it’s a bit odd seeing as how the company showed several signs of a bright future.

TripAdvisor announced earnings that easily beat expectations on both the top and bottom line. The company informed investors that it would be buying back $250 million worth of shares, or up to 4% of the company. It saw 25% revenue growth in search ad sales and subscriptions grew by more than 55% over last year. Overall it was a great quarter, and although profit taking is always possible, its 7.5% loss was a bit harsh. As a result I’d watch the stock over the next couple weeks to see if the market corrects a stock that should have traded flat or slightly higher.

Conclusion

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 logically assess what caused a stock to move compared to its valuation, or by learning how to first read a quarterly report before admiring the stock’s reaction. Then, if there is a distinction in value you are able to capitalize on the value.  


BrianNichols has no position in any stocks mentioned. The Motley Fool recommends General Motors and TripAdvisor. The Motley Fool owns shares of Apache and TripAdvisor. 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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