A basic idea that all investors should understand is new/unexpected news is the real driving force when it comes to price movement in the market. When old news is regurgitated or what was expected is confirmed, little movement will typically occur. This phenomenon can be seen quarterly when companies report earnings and provide guidance.
Each quarter companies have the duty to their shareholders to provide them with a financial update as to company’s standing. A number of data points are of interest to investors, but often two general areas can cause increased buying or selling. Earnings per share (EPS) and guidance provided by management are always under the spotlight.
EPS for the quarter is looked at in light of what was estimated by management (or analysts) and what occurred in the previous annual quarter. If the company met its estimated EPS, then this really isn’t much to get excited about. The company met expectations, which is a good thing, but it was expected to do so (If economic conditions turned very sour and the company still met expectations, then that would be different. All things being equal, meeting expectations is sort of like getting a C in school.) Secondly, the EPS performance compared to the previous year’s quarter will be referenced as an indication of company growth or contraction.
On a quarterly basis management usually provides some type of guidance as to where they see the company heading in the next quarter and/or beyond. This guidance can take many forms. Often the discussion revolves around sales forecasts, inventory and where they foresee their EPS heading in the next quarter. The news provided is often new to the ears of the investing public. Analysts will have their own assumptions and the news they are provided with enables them to have a better gauge of where the company’s future stands.
It’s is very common for a stock to meet or beat expected EPS guidance for the quarter and see stock prices stumble. The most frequent cause of such a sell offs stems from negative guidance from management. Analysts picked up on something that was below their assumptions about the future, which translates into the company’s value deteriorating, not appreciating.
In an environment where we all have limited time to devote to following the stocks we own and the stocks we have an interest in purchasing, it’s important to identify tools that can be helpful in providing the information, such as EPS estimates and guidance management has offered to the public. One such tool that addresses this specific problem is provided by RecordedFuture.com.
RecordedFuture.com enables members (free) to search companies, people or places by name to discover any stories published that contain references to events that are expected to occur at a future time. The events are recorded as a place marker on a chart corresponding to the time in the further when the event is expected to occur. For example, I looked up a company called Align Technologies and discovered that analyst EPS guidance for the 3rd quarter is at .29 per share. I could have found this information in other areas, but this tool provides a consolidated list of stories that speak to the future about a company, person or place in one consolidated location.
Additional Information: Over two years ago I recorded a video that talked specifically about the need to consider the future when analyzing stocks and not focusing on the past and what was already known about a company.
New Information Moves the Market from Dominico on Vimeo.
