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, Inc. (NASDAQ:NFLX)) 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 four top premarket movers as a result of earnings on Wednesday to determine if the moves are warranted.
Incredible Earnings Were Already Priced In
Trulia Inc (NYSE:TRLA) was among the largest movers in early trading, with gains over 15%. The company announced Q4 earnings on Tuesday after-the-bell where it posted revenue of $20.6 million, a 75% gain year-over-year (yoy) and $1.61 million better than the consensus. The company then posted an EPS loss of $0.03 that missed expectations by $0.01. Therefore, as you can see, the quarter was mixed to say the least, nothing too impressive.
The company’s guidance was impressively strong, as was its growth in individual segments. Yet still there were way too many negatives on this quarter. This is a stock trading with a price/sales of nearly 11, and is rising to a large degree on a mediocre quarter. Furthermore, the company saw great yoy growth in all areas, but data such as monthly visitors, mobile monthly unique visitors, and mobile monthly unique subs were flat over last quarter. For companies with this valuation, quarter-over-quarter growth is important, and this is an expensive stock, with mediocre earnings, and weakness over last quarter that is illogically trading higher after earnings.
Tech Stock Falls But Could Go Much Lower
Rackspace Hosting, Inc. (NYSE:RAX) took a hard-hitting loss of 12% on Wednesday after reporting its quarterly results. The expensive technology company grew by just 25% year-over-year, missing both top and bottom line expectations. The company saw a slowdown in server count and net upgrade rates as it now appears that investors are worried about increased competition from the likes of Amazon and others. The company did see strong growth from its public cloud division, but it’s a small division and is not enough to carry the weight of this expensive stock. Therefore, with increased competition, slowed growth, and a P/E ratio of 100, I expect a significant downtrend from this stock.
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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