4 Reasons Why a Stock Can Pull Back After Earnings

VaselineAugust 30, 2024

0 5 minutes read

4 Reasons Why a Stock Can Pull Back After Earnings

I’ll share why a stock can suffer even if it’s reported solid earnings…

The second quarter earnings season is relatively over. And it was the strongest earnings season we’ve had in a long time.

FactSet reports that the S&P 500 averaged earnings growth of about 11% in the quarter, which was the largest growth rate since the fourth quarter of 2021 (31.4%). Also notably, 79% of S&P 500 companies beat earnings estimates by an average of 3.5%.

Now, you may have noticed something strange going on this earnings season. It comes up almost every quarter, but this time it was just a little more pronounced than usual.

A stock might miss analyst estimates, but as long as management provided positive guidance, it was rewarded.

On the other hand, we’ve seen some stocks break estimates only to be shot down by investors.

This is one of the great mysteries of investing. It actually prompted a great question from a reader:

“I find it strange that when positive earnings are announced, the price of a stock goes down at least temporarily. Why is this happening?”

If you’ve been in the market long enough, you’ve probably experienced the same thing. And it can be incredibly frustrating and confusing.

Some stocks may pull back after posting positive earnings beats. Others, meanwhile, are surging higher after posting a positive earnings surprise. For example, Eli Lilly & Company (LLY) increased by 9%, Meta Platforms, Inc. (THE TARGET) increased by almost 10% and The target corporation (TGT) increased by 10%.

So, in today’s 360 SquareI’ll share four reasons why a stock may suffer an initial decline, even if it has reported solid earnings numbers. I’ll also explain why it’s important to keep investing in fundamentally superior stockseven though the earnings season is now mostly behind us.

Reason no. 1: Lose expectations

Let’s consider Microsoft Corporation (MSFT). On the surface, it looked like it delivered solid results in the fourth quarter of fiscal 2024. On July 30, the software giant reported that revenue rose 15% year-over-year to $64.7 billion, beating estimates for $64.39 billion.

Fourth-quarter earnings rose 10% year over year to $22.0 billion, or $2.95 per share. Analysts were expecting earnings of $2.93 per share.

For fiscal 2024, Microsoft reported total revenue of $245.1 billion and earnings of $88.1 billion, or $11.80 per share. This represented 16% year-over-year revenue growth and 22% year-over-year earnings growth. The consensus estimate called for annual revenue of $244.94 billion and earnings of $11.80 per share.

Sounds almost perfect, right?

The Intelligent Cloud company’s revenue, however, disappointed investors. The segment, which is Microsoft’s top division, generated $28.5 billion in revenue, which was up about 19% year-over-year, but below the estimate of $28.7 billion. As a result, the stock fell about 3% before recovering.

Reason no. 2: Poor guidance

Wednesday, August 21, Macy’s, Inc. (m) published its latest quarterly results. The department store chain reported adjusted earnings of $0.53 per share, easily beating expectations of $0.30 per share.

Now, the company’s revenue has declined. It reported sales of $4.94 billion, compared with $5.12 billion. But what really disappointed investors was the company’s outlook.

Macy’s said it expects full-year net sales of $22.1 billion to $22.4 billion, down from the $22.3 billion to $22.9 billion range it had previously forecast. That would also be down from the $23.09 billion reported in 2023.

That was enough to deter investors hoping for signs of a turnaround in the flagship retailer, and shares fell about 13% on the news.

Reason no. 3: analysts misread the results

On Monday, August 26, the cyber security firm Alarum Technologies Ltd. (ALARM) pulled back sharply after reporting a second-quarter earnings loss of $0.05 per ADS, compared to a second-quarter 2023 earnings loss of $2.26 per ADS. Estimates were for earnings of 0 .31 USD per ADS.

And while that was a significant earnings miss, it’s worth noting that Alarum posted operating earnings of $0.41 per share in the second quarter. Now, operating earnings provide a clearer picture of a company’s financial health without the impact of one-time events or non-operating activities, and analysts and seasoned investors should know this. But the damage was done, and the stock plummeted.

Reason no. 4: Price for perfection

Wednesday, NVIDIA Corporation (NVDA) posted second-quarter results that beat both top and bottom line forecasts. Moreover, it said it expects third-quarter revenue of about $32.5 billion, or revenue growth of 79.4 percent year-over-year. The outlook is slightly higher than analysts’ current estimates of $31.77 billion.

Still, NVIDIA shares fell on Thursday as it was clear investors wanted explosive quarterly results.

This is a perfect example of what happens when investors are conditioned to demand perfection. NVIDIA’s earnings were fantastic, but investors had even higher expectations. (Read my full earnings review for NVIDIA here.)

The Takeaway

It’s also important to note that stocks tend to pull back after a rally following earnings growth. In my experience, it’s not unusual for a stock to give back at least a third of its earnings. So if a stock goes up 12% then we can expect a 4% pullback.

So while it’s disappointing when a stock doesn’t move higher following a quarterly earnings beat, it’s not a sign that something is wrong behind the scenes. As long as companies continue to have solid earnings momentum, positive analyst reviews, and persistent institutional buying pressure, then I see any dip as a great buying opportunity. The simple reality is that good stocks bounce like fresh tennis balls, while bad stocks bounce like rocks.

That’s why it’s important to remember what Warren Buffett said about the market when he paraphrased his mentor, Ben Graham: “In the short term, the market is a voting machine, but in the long term, it’s a weighing machine.” .

What this means is that the market is not a single entity – it is made up of the opinions of millions of other investors. So the collective psychology of those individuals may prevail, but only in the short term.

That’s why I only recommend fundamentally superior stocks in Growing Investor… a strategy that paid off this year. My Growing Investor The stock beat the S&P 500 by nearly 2-to-1 in August. My buy list for high growth investments is up about 25% over the past eight months, compared to the S&P 500’s 17% rise and the Dow’s nearly 10% rise.

Collectively mine Growing Investor stocks sport 28% average annual sales growth, 498.7% average annual earnings growth, 28.3% average earnings surprises and 57% average annual dividend growth.

Overall, I’m excited about our future fundamentally superior stocks. And I hope you’ll join us for the ride.

Click here to learn how to become one Growing Investor member today.

(Already a Growth Investor subscriber? Go here to connect to the members-only website.)

Sincerely,

Louis Navellier

Editor, 360 Square

The Publisher hereby discloses that, as of the date of this e-mail, the Publisher owns, directly or indirectly, the following securities that are the subject of commentary, analysis, opinions, advice or recommendations in, or are otherwise referred to in, the essay presented above down:

Alarum Technologies Ltd. (ALARM), Eli Lilly & Company (LLY) and NVIDIA Corporation (NVDA)

VaselineAugust 30, 2024

0 5 minutes read

Vaseline

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