Holding thru earnings
August 3rd, 2005 by BWV
Here’s a textbook example of why I don’t usually hold a stock on the day they report quarterly earnings. Especially if it has been in a big uptrend, as PSTI had.
When a stock makes a big run, you have to believe that people expect good things from the upcoming report.. assuming they’re buying on a fundamental basis rather than primarily technical like myself.. (a broad topic in itself). The really big money does rely mostly on fundamental research.
If those buyers for the last 2 months are expecting good things, then those expectations are collectively embedded in the stock price. Then, Bam, the good (or “in-line” in this case) earnings news hits the wires at 4:15pm just after the market closes, and those folks are thinking: “Man this is great, i can’t wait to see the huge move in this sucker tomorrow! Yahoooo!” But with so many people looking for the same move to sell into, who’s left to do the (anticipated) furious buying? Not enough people, result in a mad rush out the door.
Sometimes holding a stock that’s made a big run into earnings really does pan out. RIMM back in December 2003 is the best example I can think of.. It had run up from single digits to about $23 in six months.. when earnings hit, the next day’s low was $29 (high $35), and RIMM never looked back. It hit $103 (for a brief moment) about a year later in 12/2004.
Still, one didn’t have to hold thru earnings to capture the bulk of that move in RIMM. A re-entry into the stock is only a commission away. Unless you have deeply researched insights into a company — and are correct about the market’s reaction to their “positive” earnings, a feat in itself — holding thru earnings has much in common with pure gambling. Meaning you have no edge. When I want an adrenaline rush, I’ll get into some mountain sports with Randall B.
