Have you ever wondered why the price of a stock falls when a company reports positive results?
It’s a perfect time to discuss this peculiar phenomenon, given we have reached the middle of reporting season.
Let’s take the case of A2 Milk.
In August last year, the company reported positive FY23 results with a 10.1% increase in revenue. While this is good news, the stock dropped 13% on the same day and only recovered five months later in January 2024. This situation is not unique and happens routinely throughout every reporting period, leaving many investors confused.
This disparity lies solely in how the market interprets the information. You have to remember millions of opinions are floating around, so while some news may appear positive to one investor, it may be negative for another. To tackle this conundrum, we have to make a few assumptions.
The first is that the market is not efficient, and the price of a stock will not always reflect the company’s fundamental value. This means that the stock price is often a reflection of anticipation and speculation of future results.
So, what can we do if we can’t accurately assess a company's stock price based on what it reports? You need to rely on the price of a stock as it appears in the charts, as this is the only transparent piece of unadulterated information available. This allows a skilled technical analyst to decide when is the best time to buy or sell a stock.
To give you another example, if you looked at the chart of A2 Milk before August 2023, the stock had been falling for eight months with no opportunity to enter. Given this, I would not have bought the stock regardless of what was reported in August.
Looking ahead, A2 Milk is due to report interim results next week.
Now, I don’t have a crystal ball, but given the share price is up over 30% from its November 2023 lows, I am expecting some good news to come out of this report, which could present a potential buying opportunity.
However, don’t be surprised if the share price falls on the release of positive news, as some investors may have expected better results.
When deciding whether to buy or sell a stock, I encourage you to look at the price chart, as it provides the best picture of whether the stock is likely to go up or down and whether to buy or sell, which is even more critical during reporting season.
Dale Gillham is chief analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au