The department store business in US has not been in great shape for a while now. Most of them continue to struggle with the spending shift to online shopping. Here's the earnings report of few big names declared this week and stock price reaction
Macy's latest quarterly revenue declined 3.9% compared to the prior year. The same store sales down 2%. What stock does: Look at the huge gap-up rally.
Ralph Lauren's quarterly revenue declined 4% and the same store sales down 6%. What stock does: Look at the huge rally.
Kohl's latest quarterly revenue declined 2% and the same store sales down 1.8%. What stock does: Look at the huge rally.
Why these stocks rallied despite bad earnings report?
Because results weren’t as poor as the Wall Street feared. Remember, stock prices are not slaves of earnings but earnings expectations. It is much more important to know what market expects from a company than what company actually does. Hence, Bad News or Good News is all about performance vis-a-vis expectations. One of the big mistakes people make - they look at the absolute number and declared them good or bad and then get puzzled by the market reaction. Oh the market is rigged.
The Financial Market is traded by human beings and hence every behavior of market can be traced back in society
Situation A: A Child scores 94% marks and secures 3rd rank in his school.
Now imagine, you have to visit their home and you know the above information - what would you visualize - A happy cheerful home, but then you visit their house and see sad faces. What would be your reaction? - What a weird family...rigged family 🙂
Why?: The child was a brilliant student all his life. He never scored less than 96% and always used to secure the first rank. This is the first time he got less than 95% marks and secured 3rd rank. The disappointment in the family will always be obvious.
The same thig happens with a stock. Sometimes a company comes out with a result: Net Profit up 50% and stock tanks 10% and people say: Oh what a rigged market without understanding what market expected out of the company
Situation B: A Child scores 45% marks and just gets passing marks in all subjects.
Now imagine, you have to visit their home and you know the above information - what would you visualize - A very sad home, but then you visit their house and see everybody smiling and happy. What would be your reaction? - What a weird family...rigged family 🙂
Why?: The child was very bad in studies. The parents expected that he will fail in the exam but somehow he survives and gets passing marks in all subjects. Obviously, parents were delighted to see that and hence happy
The same thig happens with a stock. Sometimes a company comes out with a result: Net Loss of $200 mn and the stock rallied 20% and people say: Oh what a rigged market without understanding what market expected out of the company. It might be market thought company will come out with loss of $700 mn
Next time, never form an opinion just based on how you perceive the news on an absolute basis. Focus on the market expectations which generally gets captured in the reaction. Good companies know how to manage expectations
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers