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.
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.
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