It is difficult to predict how the market reacts when results come, even if the results are seen as ‘good’. The market often surprises, as the late Mr Jhunjhunwala used to quip in his own inimitable way comparing it to the moods of humans. It is helpful to understand why stocks fall despite delivering great results. In fact, the definition of a “good quarterly result” itself is subjective, leading one to often raise the question: ‘why are markets down today?’. It could be relative to the market, relative to the company’s past performance.
1. Profit booking leading to price declines
When a significant number of investors use the good result momentum to book profits, it may cause a fall. The market also may expect price to go up if they anticipate good results; hence such an occasion might be used to book profits.
2. Shorting leading to stocks falling
Sometimes the stock could be caught in the vortex of technical based trading with some traders shorting it aggressively. They intend to buy at a lower rate later to make a profit, but in the process the stock gets hammered.
3. Sentiment bearish in the sector or overall
The market sentiment itself could be negative. Often when good results do not lead to an appreciation in the price, we can say that the market is very bearish. In such an environment, a bad result could lead to a further step fall. Such a ‘bad stock’ falling, could drag down other stocks with ‘good results’ for no fault of theirs.
4. Liquidity (lack of it) causing stocks to tumble
Some traders work on margins and are forced to sell due to lack of liquidity. Any such selling pressure could impact any good stock. This is regardless of the results being good for the company. All said and done, liquidity is still the king and is a prime reason why stocks fall.
5. Expectation Mismatch leading to stock decline
Finally it is all about “Expectations”. Even a 20% growth in numbers may not be ok if one is expecting a 30% growth. An analyst group that is crunching its own estimates may recommend a sell if there is any shortfall in their expectations. This ‘shortfall’ in expectations is why stocks fall in many cases.
6. Cash flows missing through earnings seem good
When earnings and sales are growing well, yet the company is not showing healthy cash flows then there could be a concern on the company. The concern could be about a blip in performance or more seriously about the management not being fully transparent in their disclosures.
7. Business Outlook not rosy leading to stock tumble
Even if the company delivers stellar results, tie stock might still fall if the management gives a guidance that is pessimistic. For example, a bank might deliver great results but may announce that Non Performing Assets might increase in the near term. Such a guidance is enough to set the stock price tumbling.
The markets are composed of investors, each with different expectations and timeframes. They react differently and a tipping point towards one side can make a stock zoom or fall. The above reasons explain why stocks fall. Interestingly many of these factors may overlap, thereby accelerating the movement of the stock. A prudent investor would use such occasions to accumulate more quantities of good stocks given the emotional arbitrage that is available.
Ram Kalyan Medury, Founder & CEO Jama Wealth