Have you ever heard of stock news like – “Today’s report showed less supply of oil than expected – stocks and prices fell hard today”?
Of course, you did. Everybody who is in share market and follows market trends and news has suffered from the same situation. Mostly, the stock’s price is partially based on the investor’s expectations towards company’s earning potential. When a company releases an earnings report, the market will react accordingly and do the adjustments in the prices. But, sometimes, the issued report by the firm does not meet the market expectations and the stock’s prices likely drop. However, it is common, in fact, many times we’ve seen a firm or company exceeding analysts’ expectations and still, the stock’s price falls.
So, what’s the main reason behind stock decline on good news?
To understand it clearly let’s see the example given below:
Example: Let’s assume analysts expected ABC Corporation to report Earning Per Share (EPS) of $1.00. And the company announced EPS of $1.5 and beat the expectations, yet investors respond by selling shares.
If you notice, the news was clearly “good” then why?
Well, it could be because investors were expected a profit of much higher or maybe the company has a background of beating percentage more than it. Either way, despite being news, released stocks declined.
Reason #1 Whisper Number
Perhaps you’ve heard of it. Nevertheless, the whisper number is an unofficial number or EPS according to individuals analysis. The analysis done by those individuals are not published like analysts expectations and based on gut feel or market trends.
Note: – Whisper number is different from the consensus forecast.
To get a clear image, let’s assume the ABC Corporation has a whisper no. of $2.0 per share but by reporting $1.5 the company fell short of what investors were expecting despite being analysts expectations.
Reason #2 Noise Traders
These are non-professional investors or traders who buy or sell without any guidance of professional analysts and advanced fundamental analysis. Noise traders are often impulsive and tend to overreact to the good and bad news.
So, if ABC Corp. begins to sell off just after a little profit in earning reports then noise traders may jump and jeopardize the situation.
Note: – Noise traders make trades based on news.
Final Thoughts: –
The best way to avoid the stock’s value declining is by keeping a safe distance from noise traders and does fundamental analysis of your prospective investment. Plus, keep an eye open for whisper numbers.
Hope, this article helped you in getting the right information regarding the stock’s value decline despite the good news. If you have anything to share or ask then don’t forget to mention in the comment section given below.