Stock Reporting: Why Are Stocks Falling After the Report?

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Stock reporting is perhaps the most controversial period, raising a lot of questions. I am often asked why stocks fall after a report. And even more often people ask why stocks fall after a good report. In order to answer them, you need to deal with three points.

  1. What does stock reporting consist of?
  2. What do analysts expect from the report?
  3. What happens to the stock price before the report?

What does stock reporting consist of?

The reporting of the company consists of direct publication of the results of work for the reporting period. Traditionally, these results are data on revenue (Revenue) and earnings per share (EPS). Also, depending on the specifics of the business, companies can provide additional metrics.

In particular, for online services this is the number of subscribers, for airlines – the workload of seats on the plane, for hotels – the volume of bookings, etc. Using the example of Caterpillar (CAT) on the Seekingalpha website , a press release with the results of the report might look like this.

Along with the publication of the results for the reporting period, companies can give (but not always) their forecast (Outlook, Guidance) regarding what they expect in terms of revenue and earnings per share in the next quarter and at the end of the financial year (important: financial year and calendar may differ for some companies). Using the example of Micron (MU) on the Seekingalpha website , the forecasts might look like this.

After the publication of the results of the report, the company conducts conference calls. On them, company managers can give additional explanations to the results of work and provide information that can affect the perception of the report by the market (how exactly? – we will analyze it further).

What do analysts expect from the report?

Prior to the publication of company reports, leading investment houses publish their expectations for revenue and earnings per share for a particular issuer. These expectations are called consensus forecasts.

In their consensus forecasts, analysts rely on the company’s historical financial statements, an assessment of the potential of the industry in which the company operates and the situation in the economy as a whole. Therefore, consensus forecasts are a kind of benchmark for evaluating the results of reports, and we will look at how they work below.

What happens to the stock price before the report?

Before the release date of the company’s report, it is never superfluous to take a look at its daily chart and see what is happening on it. Often, if market participants expect a strong report, then the share price on the chart will rise and vice versa. (We will analyze a particular example below.)

  • Additionally, you can check stock options and see what the participants in this market are betting on (we discussed how to do this here ).

However, the movement on the price chart does not mean that the growth or decline will continue before the report. And here we come to the most interesting thing, namely, how all the factors discussed above interact: the company’s results, the expectations of analysts and market participants. And at the same time, and to the answer to the question why stocks fall after a good report.

How does the stock react to the report?

After the company released the results of the report, the market compares them to the consensus forecasts. If the numbers for revenue and earnings per share are at or above the forecasts, then that is good. (At the same time, EPS data is more important than revenue.) But this does not mean that stocks will react with growth.

  • The market always looks to the future, so the forecast given by the company is more important to it. And this is a key point in assessing its reporting.

If the company raised its forecast, then this is definitely a positive signal, on which the shares are growing. This was the case after the publication of the Elecrtonic Arts (EA) report, when, along with strong figures for earnings per share (EPS) and revenue (Bookings), the company raised its forecast for the financial year (Raises FY 2022 Outlook is just the case when the calendar and fiscal years do not match).

If the company reported an increase in earnings per share (EPS) and revenue (Revenue), but at the same time lowered its forecast or announced the expectation of growth in profit or sales, then this will be perceived by the market negatively, despite the good results in the current quarter.

This is exactly what happened after the Amazon (AMZN) report on July 29, 2021. The company reported well, but warned of a slowdown in profits and sales and that the slowdown in growth may continue after the pandemic boom. As a result, as can be seen in the chart below, after the publication of the report, the shares opened with a gap of 7.5% down.

The above daily chart of Amazon (AMZN) also clearly shows that before the report, the share price renewed its historical maximum, from which it decreased and which it could not update before the report. This was a signal that many market participants were fixing profits before the report.

Why? Because when the stock price is at an all-time high before the report, the report must be incredibly strong in order to justify the current quotes and push the price higher. (After all, most of the expectations are already in the price before the report.)

What else could affect the stock after the report?

In addition to reporting data and forecasts, the dynamics of shares after the report may be influenced by statements from top managers during a conference call. On it, for example, it can be announced about the share buyback program , the payment of special dividends. This can support the share price, if the report was not very good, but on a strong report, raise it higher.

It is worse when, during the conference, the company’s management announces an additional issue of shares. This is an unambiguously negative signal, diluting the share of shareholders and forcing them to sell, thereby lowering the share price.

Well, in general, the way managers behave during the conference can sometimes influence the movement of stocks. After all, many investors listen to the conference in order to understand with what intonation – confident or not, they speak.

Should you buy stocks ahead of the report?

I believe that with this post I answered most of your questions about stock reporting. But surely you still have one unanswered question. Should you buy stocks ahead of the report? As you understood from the review, reports are practically a lottery.

And a good report does not guarantee an increase in prices, however, as well as a bad report – its fall. Yes, sometimes the company publishes a weak report, but it turns out to be not as bad as analysts expected, and as a result, the stocks react with growth. The reporting season paradox.

Therefore, if you trade reports, then, perhaps, in two directions, for example, through options, using the Straddle. In this strategy, it is important that the movement is strong and it does not matter in which direction. But options are another topic …

Well, if you just hold stocks on which you made good money, and the company has a report soon, then it would be reasonable to fix a part of the profit. In this case, if the report comes out weak, the impact on the portfolio will be less, and if it is strong, then you will have a part of the position to make a profit.

You may have your own options for managing the pre-report position. Tell us about them in the comments below. And, of course, write if this post helped you to better understand the behavior of the stock after the report.

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