Assessing Earnings and Upside Potential for Thursday’s Movers: The Men’s Wearhouse, Inc. (MW), Ebix Inc (EBIX)

The Men's Wearhouse, Inc. (NYSE:MW)Knowing how to react when a stock shoots higher after earnings is one of the more common questions I receive as it relates to individual stocks. Sometimes post-earning reactions create opportunity, and other times they do not. In this piece I am looking at three stocks that saw great movement on Thursday, and I am determining if the reaction was worthy of the fundamentals.

Oversold Stock with Low Expectations Creates Gains

Ebix Inc (NASDAQ:EBIX) traded higher by 4.05% on Thursday after the company posted a mixed earnings report. The company posted a slight beat on the bottom line but missed on the top line with revenue growth of 23% year-over-year (yoy). The company’s opex was near even with revenue growth, and the company issued no guidance for upcoming quarters.

The driver for Ebix Inc (NASDAQ:EBIX)’s movement on Thursday was not necessarily the quarter, but rather lowered expectations and a stock that was oversold with a one-year loss of 33%. Overall, I liked what I saw from the company: I liked the 23% revenue growth and I liked that gross margins were 80.7% and that the company bought $3.2 million worth of shares and plans to continue buying in Q1. However, because of the stock’s volatility and the inconsistencies of the company, I’d still like to see one more good quarter before buying the stock.

Possibility of Profitability Creates Optimism for Investors

Shares of Sigma Designs Inc (NASDAQ:SIGM) saw a massive pop of 17.65% after reporting a mixed earnings report. The company missed on the bottom line but beat on the top line, despite a 31% yoy loss in revenue. The company also guided for Q1 revenue towards the low end of the Street’s expectations but did say that it anticipates profitability in this current quarter.

Basically, the market ignored a lot of negatives for the guidance of profitability. However, this is a stock that has seen many years of decline and with it being oversold, the guidance for profitability is a sign that its restructuring and cost-reduction efforts have been effective. As a small cap company with a price/sales ratio of 0.81 I do think this is a stock worth watching, however I do want to see top line growth before considering a long position.

Speculation Pushes Shares Higher, Not Earnings

Much like SIGM, shares of The Men’s Wearhouse, Inc. (NYSE:MW) rose for reasons other than its quarterly performances. The company’s earnings were fairly weak, as it missed on both the top and bottom line, and posted sales growth of just 8.2%. The company saw just 1% growth in its Men’s Wearhouse business, which made up 61% of its total Q4 sales. Therefore, why did it rally almost 20% on Thursday?

Men’s Wearhouse rallied for two reasons: In part due to the approval of a $200 million share repurchase program but mostly because the company hired Jefferies to assist in evaluating alternatives for its K&G operations. The Jefferies news is the big one because it could significantly strengthen the business. Not only could the company sell K&G to improve its balance sheet but it would be eliminating a segment that lost business in Q4. Personally, I do not buy stocks on the prospects of strategic alternatives, however if the company does in fact divest or sell K&G, then MW becomes very attractive.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill), I examine human behavior and the psychological effects that take place in the minds of investors when a stock shoots higher or falls drastically lower (think roulette at a casino), with one scenario being earnings. For many investors, chasing these trends is common, even addicting, and very few are capable of realizing their losses because of their occasional gain.

Investors need to avoid this behavior after earnings, and look not at the performance of the stock but rather the performance of the quarter and the valuation to determine if a position is wise. By doing so, you will be able to save yourself money by not being sucked into a situation that looks too good to be true.

The article Assessing Earnings and Upside Potential for Thursday’s Movers originally appeared on Fool.com and is and is written by Brian Nichol.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!