Good Quarterly Reports + Stock Drops = Conspiracy Theories
I'm an amateur investor and by most accounts, just your average joe. I'd like to talk about something alarming I appear to see frequently: Companies that report great quarters, but drop big immediately on the news! Woo-hoo!
The 7% drop of Infinera today on beating expectations, and (I listened to every word of the conference call), Tom Fallon's palbable optimism and excitement for 2013's prospects, backed with concrete statements - just doesn't add up. Either did Facebook's nearly 10% drop on turning in a better than expected quarter. Whenever this scenario happens, we can be assured of hearing lots of simplistic, general, & unfounded explanations for the mystery.
The last explanation for Infinera's drop I read here on the Fool, was, "Infinera matched on revenue, and beat earnings, but Investors actually wanted more (than Wall Street's expectations)." That answer and the like, are equivalent to shrugging ones shoulders, putting ones hands up in the air, and saying "I really don't know, it doesn't make sense and I can't explain it, but I guess it just wasn't good enough."
Another possibility of course is these stocks run up too high pre-earnings, and no matter how good the repoorts are, they just serve as a corrective mechanisms. I'm not satisfied by this either. It still happens too often.
So, what quarterly report's numbers are good enough, if not the Street's stated expectations? Does The Street have a secret set of expectations they don't let us see? Ordinary investors would really be hung out to dry then, never knowing what to look for.
I think this perceived frequency of good reports causing stock-price drops should at least be talked about, because I think average individual investors have similar perceptions that something is just plain rotten in Denmark, and it's enough to scare them out of the market.
Here at the Fool we're all long-term investors, right? And we lift our chins up and say, "value always wins in the end, so we eschew these short-term issues!" Okay, but isn't this more about the investing world we all exist in, than a short-term / long-term discussion?
Here's another explanation for why companies fall on great news, shrugging my own shoulders and rationalizing, however I want to. Sir Arthur Conan Doyle said, "Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth." Big-time institutional investors could in fact be using a secret set of numbers, or, maybe stock-prices have actually run too no matter what the quarter brings, making Doyle's idea here an imperfect fit...But I'd like to offer an improbable, and more insidious explanation: Algorithms.
The sophistication of algorithms cannot be underestimated, and they rule our market today. When it comes to companies' stocks dropping, off of great reports, why would we ever guess that algorithms are taking the great news into account? Does the algorithm say: if input = great news, output = sell? No. Rather, if the algorithm knows enough "dumb-money", i.e., money from ordinary average investors have piled into a stock pre-earnings - then might it trigger a trading pattern designed to scoop up that dumb-money? What do you think people make algorithms for? Presumably, enough dumb-money sells out and takes some losses - the Algorithm Investor's gains. That should really be their name, shouldn't it - Algorithm Investors.
Now this may very well be insane, crazy, or idiotic. I'm not saying it's not any of those things. But is it that much worse an explanation than, "I guess Investors were expecting more"? Again, I'm just your average Joe. And my whole point is - I think many of us average joe's are thinking things like this, about the Stock Market today, and that can't be good. In fact it's really bad.