Stock Falls With Bad Earnings Already Priced
Mining company Cliffs Natural Resources Inc (NYSE:CLF) fell 13.75% in early trading to add to its 50% loss over the last year. The company actually beat expectations, but revenue losses continue to scare investors. Then, there was the company’s decision to cut its dividend by 76% and announce a public offering! There aren’t too many positives to draw upon this quarter; however, at what price is bad earnings already priced into a stock?
The company’s valuation had fallen 50% in the last year alone, yet its revenue for the quarter only declined 4% compared to a full-year loss of 11%. I view these facts as positive, revenue may be finding a bottom and with a P/E ratio under 6 and a price/sales under 1 the stock is cheap. I am not sure I’d try to catch the falling knife on Wednesday, but after the panic subsides then we could see a nice rebound.
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.
The article Are these Earning-Related Moves Fundamentally Warranted? originally appeared on Fool.com and is written by Brian Nichols.
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