Long-term investors need to ignore the noise in the marketplace and focus on the signal. This means ignoring short-term price swings and focusing on long-term trends in the company’s value and the market’s perception of that value. Price changes are most important when they are the result of substantial news about the company. The market has provided many examples of news-moving equities in recent weeks. Here are three examples of how new developments impact stocks.
Earnings: Michael Kors gets a bump
The most common case of news-moving stock prices is earnings calls. These quarterly events are the bread and butter of traders and investors, since they are moments when companies inform the market of changes to their revenue, EPS, and business models.
Michael Kors (KORS) rose over 5% in Tuesday morning trading on a strong earnings beat. Revenue rose 38.9% year-over-year and EPS of 71 cents beat consensus estimates by 3 cents. In the earnings call, many good numbers drove the stock higher and higher in pre-market trading, and the stock had good momentum in trading in the morning despite the market being bearish overall.
Competitive pressure: Pandora rises on a press release
While earnings calls are the most typical way that news impacts a stock, press releases with significant news about a company’s business model can also cause a stock to rise or fall in a short time. Pandora (P) rose over 3% in intraday trading and was as high as over 5% in premarket on news that listener hours grew by 18% year-over-year.
Pandora releases listener hour metrics monthly, but these do not usually have much impact on the company’s stock. This time was different. October was the first full month after the iOS 7 and iTunes Radio release, so Pandora’s listener hours would be a clear indicator of how successful Apple has been in stealing Pandora’s lunch. With robust user growth, it now seems clear that iTunes Radio is no threat whatsoever to Pandora’s dominance of the internet radio space, prompting investors to enter or double down on the company.
Market uncertainty: NQ Mobile is decimated by accountants
Relatively unknown worldwide, small-cap upstart NQ Mobile (NQ) is a Chinese mobile technology company, whose stock rose 300% in 2013 thanks to its ideal position at the intersection of several high-growth and frankly trendy touchpoints. Mobile, tech security, China. In a bull market where appetites for risk are expanding, it’d be hard not to make money.
That was the case until Muddy Waters, a research firm, released a report calling the company a fraud. The stock plunged from $25 to $9, and briefly recovered to $15 before falling again to $10 as the market debates the validity of the report and NQ’s various responses. The debate has become fierce, with NQ Mobile’s executives releasing blog posts, press releases, and even appearing on Bloomberg to combat the accusations. The debate continues, providing price volatility and opportunities for bears and bulls alike.
Conclusions
In each of these cases, we see major stock price shifts as a result of market moving events. Analysts who focus too much on creating and refining their DCF analyses and tweaking their models will miss out on these opportunities if they do not do their own due diligence. These events, like so many before them, demonstrate investors’ need to understand not only how finance works, but how the companies they invest in work as well.