Wednesday, August 16, 2017

Why Is My Stock's Share Price Declining Despite Announcing Favorable Earnings Results?

Share price of a company moves up and down everyday for many different reasons.

During earnings announcement, they are especially more volatile because investors are pricing in adjustment to the share price based on what was announced in the earnings. Earnings are a significant underlying determinant factor that can move the share price of a company very quickly, either for the good or for the worse.

In general, whenever a company announces earnings which was not favorable, and I defined not favorable at this point by lower year on year comparison, the share price would usually dived southwards. On the similar end, when a company announces favorable earnings results, the share price would usually get boosted the next trading day, signaling positive sentiments and outlook from investors.

This is not always the case though however.

The Singapore market recently is behaving like one which baffled many new investors.

Take UMS for example, a semi-conductor company which is enjoying its upcycle period in these few years. The earnings result was very favorable and more than doubled the previous year earnings. The company even managed to reward shareholders by issuing a 1 for 4 bonus on top of the usual interim 1 cent dividend. Upon the announcement, the share price dived from a high of $1.17 to the current period of around $1.02, almost a 15% decline in share price.

The same goes for another semi-con company, AEM.

Another example recently in the market is Elec & Eltek. The company issued a profit guidance announcing that the company would make exceptional earnings this year. The share price went up for a few months and upon the earnings result, the company announces a 500% increase in earnings per share. Despite the favorable result, the share price dipped the following day by about 4-5%, signaling the market's disappointment perhaps by the lack of the interim dividend, which have mostly been priced in the expectations.

I think this is what makes investing an interesting and challenging experience.

The fact that market reacts mostly dependant upon priced in expectations signals that it is very difficult to predict movement in the short term. In the longer term, they would retrace back to the fundamentals of the company and share price and valuations would follow eventually.

This is probably the reason why value investing for longer term is such difficult to follow because you really need to have patience and by that it means having to stomach the up and down of market sentiments almost on a daily basis.

On one hand, you need to ascertain the outlook fundamental of the business and on the other hand you need to evaluate the current valuation of the company that you paid for. It needs to go both hand in hand to capture the most reward and they are often difficult to find which makes an exceptional investor having to go a step ahead of the others before others find the gem.

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  1. from a market dynamics stand point, stock market is forward looking.. it may be unsure whether such stellar performance can be repeated next quarter? hence the sell down..

    perspective of individual investors or fund house, similar to above. share price been rising relentlessly, lets take some profit first..

    valuation wise, its PE maybe too high and its wise to take a rest for next phase of price growth when new catalyst emerge..

    honestly there are so many explanations, reasons, but all with hindsight benefit.. These reasons may not even be the real cause at all. just conjured up by analysts or economists to meet human beings insatiable appetite for logic and cause/effect.

    But the crux is, would knowing these 'causes' help investors predict price movement, get out in time, and get in before price rise again? i highly doubt so.

    Many beginning investors are asking the exact same questions in Investing Note now. Perhaps they should really accept the fact that share investment is not science, and there can be all reasons made up by analysts to explain price fall if they believe it, or there could be no reasons at all when they simply accept that this is market behaviour.

    Instead of asking around try to find explanations, its really more fruitful to sharpen FA skills, business prospecting, understanding market dynamics, understanding industry development, and honing mental toughness to stomach such price movements that are as common as afternoon rains in Spore as it is in share market..

    1. Hi CSCCC

      Thanks for sharing your thoughts there. I'm sure they are useful to many readers.

      Agree that when there are a daily movement, many people are looking for reasons to justify the case. Sometimes, they can be just going up and down for a simple demand and supply reasons. It will be much better to sharpen FA or TA skills so the strategy will continue to sharpen over time and be better.

  2. I guess Investors will also look at the the longer term prospect of the companies...whether the growth is sustainable or not? whether the business has high barriers to entry? whether the revenue is sustainable (e.g. is the customer is well diversified)?

    I am a firm believer that we have to look for the longer term prospect in term of the growth of the company (not just one or two quarters), the type of industry the company is in, and also the financial status of the company whether they are able to sustain or even increase the dividend payment to the shareholders.

    Just sharing my thoughts.

    1. Very good thoughts there. Thanks for sharing.

      I am also a big believer of the longer term prospect that the share price would revert back to the underlying fundamentals but it is always hard when we think through the business which will go through up and down cycle and in terms of share price it means it will fluctuate too, more than we like to.

  3. Did one ever ask why the share price went up when there were no favourable announcements at all?

    1. Hi Anonymous

      Good question there. When share price is up, no one cares about whether the profits are down or up. Huat first then analyze. hahaha

  4. Hi B,

    I no longer follow UMS closely now.

    1 reason why price move up and down is not so much of YOY results. It's about expectations.

    If there is a blood bath in a sector and a company still edge out a decent profits despite a smaller one YOY, it might not necessarily head south.

    In the same veins, if expectations is for growth to materialize and EXPLODE but the improvement is just in the single digit, expect it to go south.

    Too many factors at play here. But if u can get the earnings right for the next 3 years or so, (fisher said that) you can most probably do no wrong la

    But I realise 3 quarters is already a long time
    In the market

    Everyday kena slap my Mr market ...

    1. Guess what, even the CEO of the company can't "get the earnings right for the next 3 years" LOL

    2. Hi SI

      Yeah, you hit the nail there.

      Mr Market makes up of a lot of very interesting people with many different mindset and objective. I think as retail investor, the biggest advantage is for us to get in and out of a company fast and liquid. All things else, we are pretty much at a disadvantaged from the information value chain point of view.

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