why would a companies stock price dramatically fall when good earnings are reported?

Posted by redneck_investor on February 06, 2009 (02:35AM)

hi all   take a look at DLTR feb fifth 8 am......

im relatively new at investing. ive been into stocks for only a month and have already earned 35% of what i put in; however, im not sure about why a stock price would drop like DLTR did....i kind of have an idea and here it is..

i believe that the stock price was over valued....people knew that it would make profits  so they went over board and made the price rise really high. when the company released its info, they realized it was over valued and it dropped down to where it should be......this goes the same for under evaluation ...perfect example would be JAVA    when the fiscal quarter info was released....

Am i right about what i just said, or is there more to it ....also,   i havent quite figured out how to calculate what the actual stock price should be......can someone walk me through it with one stock plz....like for example, use DLTR   and tell me how the new fiscal results would be calculated to get its current stock price..   I often see prices adjust to a new level after a fiscal quarter's info has been release, and would really like to know about the math behind those adjustments. thank you very much.

my assumption for dollar tree is that since the economy is doing very poorly, everyone decided that shares of cheap dollar stores were the way to go ; however, everyone bought into it and made the stock fall off a cliff once they found out that it did go up but not as much as they had anticipated.

Posted by Ducati Rider on February 06, 2009 (08:40AM)

I may be reading this wrong but it looks as if the 4th quarter guidance was raised and the stock dropped. 

If that's what happened, traders may have been expecting the guidance to be increased more than it was.  The stock may have risen on expectations which were not met so it dropped to adjust to the new expectations.
Owl001_thumb Brokerage Account

Posted by Owl on February 06, 2009 (11:27AM)

No one really knows why the market does what it does; it often seems to be moving randomly. However, in this case, your explanation sounds right.
As to valuing stocks, there is of course no agreement on how to do that (which would take all the fun out of speculation, wouldn't it?) But many people look at Price/Book ratio. In the case of your DLTR, it looks like it's trading at 2.9 times book value. This is very high. It is more common for companies to trade at closer to, say, 1.3 times book, although it varies between different industries.

Even more popular is Price/Earnings ratio. DLTR appears to be trading at 15 times earnings. This is a pretty normal P/E ratio, of the sort you would expect in normal times. But since the market is severely depressed at the present time, P/E 15 is very high; most companies are far below that.

There are other things people look at too, like the debt/equity ratio, return on equity, etc. But, just based on those two indicators (which are my own favorites), I would say DLTR is still significantly overpriced, even after the price drop.

This case, I think, illustrates what I was saying in another thread about the mistake of "picking the hot industry".

Posted by incubus on February 06, 2009 (02:12PM)

In October I closely followed the best stocks I could, I'd wait for the earnings and then buy into rallies.
Every time, the stock would rally for a few hours, then plummet.

I personally think it was hedge funds preying on those stock rallies.
Nopho_thumb Brokerage Account

Posted by SF on February 06, 2009 (02:20PM)

I think this thread might have some relevent info for you as well:

Buy Before Earnings??
Nopho_thumb Brokerage Account

Posted by SF on February 06, 2009 (02:29PM)

As far as DLTR goes for that report the other day - They didn't actually do their earnings report. It seems they just gave more precise guidance in advance and released total sales which turned out below estimates. Also what ducati rider said about their guidance. Estimates for EPS are 1.14 and DLTR came out and said they expect it higher than midway in the range they previously provided. Considering that the previously provided range only went up to 1.15 and they only specified the range leading up that, odd are (based on the wording) against them making 1.14 although that is just my opinion. All of this is mostly an opinion though, mixed with a few facts. Take it for what it's worth.

Posted by incubus on February 06, 2009 (04:03PM)

Speaking of guidance, thats another thing altogether...
I've purchased stock after reading earnings were incredible, all to have the company come out with heinous guidance hours later for the next quarter and watch in horror as my gains nose-dive.

Companies try to sugarcoat, or sneak the bad news when hopefully no-one will notice, this is one thing I really like about AAPL, they   always underestimate their guidance, people know this and it's not as bad when they announce negative guidance.

You must Log In to post to this forum.

Not a member? Register Now to …

  • See what other traders are doing
  • Make your own trades public
  • Share your thoughts on a trade
  • Join or start a group
  • Connect with like-minded traders