Recent market response to earnings reports somewhat explained in todats NY Times article:
Winning Stocks Are Losing Momentum
By GRETCHEN MORGENSON
NEW YORK -- For stock market investors, great earnings news is
no longer good enough.
In a big reversal from last year at this time, stocks of companies posting
exceptionally positive earnings surprises are underperforming the market
rather than outperforming it.
According to Credit Suisse First Boston, stocks of companies posting
truly upbeat earnings surprises -- those exceeding analysts' expectations
by 10 percent or more -- underperformed the Standard & Poor's
500-stock index by an average 0.6 percent in the second quarter.
In the comparable period a year earlier, stocks in companies with
especially good earnings news outperformed the index by 12.5 percent.
The turnabout is intriguing because investors in recent years have made a
killing by buying stocks in companies whose numbers beat the Street's.
This strategy, the dogma of momentum investors and day-traders,
appears to be losing its punch.
"Chasing positive earnings surprises has worked only occasionally over
the last few quarters," said Christine A. Callies, the chief investment
strategist who did First Boston's analysis of stock performance after
earnings surprises. "Something has changed."
Of the 84 percent of S&P 500 companies that have reported
second-quarter results, 24 percent posted positive surprises. Only 6
percent dropped earnings bombs.
That is strong performance compared with last year's. In the second
quarter of 1997, 28 percent of the S&P 500 companies reported
positive surprises, while 10 percent came in well under Wall Street
estimates. The First Call Corp., which compiled these figures, considers
a surprise to be 5 percent above or below the consensus.
Consider Dollar Thrifty Automotive Group, the car rental company, with
$850 million in sales. On Wednesday, the company reported
second-quarter earnings of 38 cents a share, almost 9 percent above
analysts' expectations. Revenue grew 6.7 percent from the year-earlier
period.
Dollar Thrifty's stock drifted down 25 cents a share on Wednesday, to
$14.25. The shares ended last week at $13.875, down 4.3 percent on
the better-than-expected earnings news.
Investors may have been reacting to a statement by Dollar Thrifty's
chairman, Joseph E. Cappy, that rental revenues in the company's
Florida operations had been weaker than expected. If so, they were
ignoring Cappy's comment that the company was seeing improved
pricing trends in the summer months.
Of course, the market may just be weakening over all. But if investors
are fleeing stocks of companies issuing great earnings reports, several
theories may explain why.
"Investors are either becoming more distrustful of companies reporting
positive surprises or worried about the complexity of the Asian situation,"
Ms. Callies said.
Investors may also be acting on their increasing suspicions that much of
the analysis coming out of Wall Street is superficial at best. Or they may
suspect that some of the companies reporting earnings surprises may in
fact have orchestrated them by guiding analysts lower in their estimates
earlier in the quarter. That way the company has a better chance of
beating expectations.
Finally, sky-high stock prices may make investors nervous; good news is
as good a reason as any to take profits.
Whatever the case, chasing upbeat earnings news is a deal less profitable
than it once was. |
