A stock's reaction to news — whether it's to an earnings report, a merger or some other major news event — can often tell you more about the company than the news itself.
If the news appears at first glance to be positive for the company but the stock slides anyway, investors may be concerned about the sustainability of growth, rising costs or myriad other potential negatives.
Conversely, a weaker-than-expected response to news with a positive stock reaction could mean that the company's future is bright despite the unexpected headline.
How Earnings News Can Make Or Break A Stock
Earnings reports cause many of the largest moves in stocks, and they require special care. Strong earnings can fuel top stocks to previously untouched levels — and above new buy points — while a less-than-impressive announcement can send shares tumbling.
But in order to make a profit from earnings reports, an investor also needs to look at the company's fundamentals and its chart to make a proper judgment.
In another example, on Feb. 10, Monolithic Power Systems crushed analyst estimates for the fourth quarter of 2021. But after an initial rally on the news, the stock faded badly and closed near session lows.
On a year-over-year basis, Monolithic earnings jumped 62% while sales climbed 44%, easily beating estimates. At first, investors were impressed. After the initial fade, shares added 16% over the next three days. Then, the stock began to fall back. In a few weeks, it was below where it was before the earnings were released. The chip company has been trading in a horizontal range since then.
How A Top Stock Can Withstand Bad News
The stock just wasn't ready for a sustained climb. The maker of integrated circuits used in electronics on May 2 again beat analysts' views for Q1. Despite rallying the next two days, the stock erased those gains in just three days. The market correction was a weight, too.
Another example of judging a stock by its chart rather than news is Johnson & Johnson. The company was hit with a $4.7 billion judgment in a class action suit over its talcum powder in July 2018. Looking at the chart, the event hardly made a dent. J&J formed the bottom of its base and climbed on.
That didn't necessarily make J&J an instant success, but it was hardly the company's downfall. A November 2018 breakout went nowhere, and it wasn't until Covid came along two years later that J&J started to gain momentum.
Follow Michael Molinski on Twitter @IMmolinski
