Education · Lessons from the Byte
Good earnings. Why did the stock fall?
A strong earnings report doesn't necessarily equate to a rising share price. A company can beat expectations and still see its shares fall, particularly if the market has already anticipated good news.
In one of Ian's earlier lessons, FedEx had improving earnings estimates and strong delivery demand ahead of its report. But there were two different benchmarks for its earnings:
- Consensus estimate: $4.99 per share.
- Whisper number: $5.19 per share.
A result above $4.99 could beat consensus while still disappointing investors expecting $5.19. Some of that optimism may already have been reflected in the share price.
The FedEx analysis also highlighted the importance of guidance for the coming year. Investors weren't just interested in a strong quarter. They wanted to know whether the increased delivery demand could continue.
Expectations can lift a stock before earnings and leave room for disappointment after a good report.
Ian distinguished between a trade based on anticipation leading up to earnings and one that depends on the market's reaction afterward. He noted that even companies reporting excellent earnings had experienced share-price pullbacks.
The question isn't simply whether a company will report good earnings. It's whether those earnings and the outlook will meet the expectations already reflected in the share price.
This lesson first appeared in Weekly Options Bytes, our free email from Ian Harvey’s options research desk.
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