expectations

Duck Season! Rabbit Season! Earnings Season!

photo shows a few ducks flying through a gray sky, tall grasses in the foreground

Maybe you’ve seen the classic cartoon that goes like this: Bugs Bunny and Daffy Duck, chased by the hunter Emler Fudd, start arguing over which animal Elmer is supposed to be hunting.

“Duck season!” Bugs yells.

“Rabbit season!” Daffy insists. And they continue back and forth until Bugs cleverly switches his response to “Rabbit season!” At this point Daffy Duck counters with the only logical response… “Duck season!”

And Elmer promptly shoots his foolish prey.

There is another, equally confounding (and sometimes comical season) you may have heard about: “Earnings season!”

Every company that issues publicly-traded stock is required by law to report about its financial wellbeing to investors and regulators, once every quarter. While every company has its own fiscal calendar and different companies report at different times, most companies stick to straightforward calendar quarters so major earnings reports tend to bunch together every three months.

In theory, the effects of this should be simple for investors: a company that posts a good performance should logically see stock gains, and a company that posts a poor performance should see stock losses.

But investors tend to view earnings reports through the lens of their expectations. A company that does well might be seen as a disappointment by investors who expected even better from it. And even when a company beats consensus expectations, some investors may second-guess the consensus and bet on an even bigger blowout.

All of this is to say that earnings season can be a very volatile time. Stock prices often swing wildly up and down in response to earnings reports, often in ways that are confusing or counterintuitive. If you listen to market commentary you may hear many different (often contradictory) explanations for why a company dropped on seemingly good earnings or rose on seemingly bad earnings.

It is a confusing experience, and trying to make sense of stock moves during earnings season might make you sympathize with Elmer Fudd.

While it can be alarming to witness stocks jump like this in the middle of earnings season, over the long run, much of that volatility will be forgotten. Ten years from now, do you think you will remember what one of your stock holdings did in response to one earnings report many years ago? The big investment news stories worth remembering will be about bigger news than a quarterly earnings report.

We already know stock investing involves volatility—and some of it comes around like clockwork every three months. Clients, if you are ever wondering about sudden market moves, give us a call before anybody goes daffy.


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Duck Season! Rabbit Season! Earnings Season! 228Main.com Presents: The Best of Leibman Financial Services

This text can be found at https://www.228Main.com/.

Deepwater Disaster and Expectations

© Can Stock Photo / curraheeshutter

A decade ago, perhaps the biggest environmental disaster in American history began to unfold. The Deepwater Horizon drilling platform in the Gulf of Mexico exploded in a fireball from high pressure methane gas coming up from the well.

Eleven workers were never found; seventeen were injured. Two days later, a slick began to form. It was the harbinger of the biggest oil spill ever, over 200 million gallons.

Day after day, the nightly news and cable channels showed images of oil billowing up from the sea floor. It was like a never-ending horror show, dragging out for eighty-seven days. Environmental damage to the waters of the Gulf and its beautiful beaches would clearly exact a heavy toll on the fisheries and tourism industries.

The well owner, BP, was rightly vilified for operational lapses and safety practices. Civil penalties and restitution were bound to be in the many billions of dollars. Many people wondered how the company could even survive, or do business afterward.

In the face of these challenges, it is not surprising that the price of BP stock was more than cut in half in less than three months.

The surprising part is that the stock bottomed and began to move up even before the oil stopped billowing into the Gulf.

There is a lesson here about expectations and unfolding reality. When the consensus expectations got below the reality that would eventually emerge, the stage was set for unexpected gains. As a company, BP did pay in many ways for its failures, in amounts that did get into the many billions of dollars.

But reality almost had to be better than the expectations, since the expectations were so low.

(This is not a recommendation, or a recital of our research prowess. We never advocated for the purchase of BP stock near the low point, believing it to be too much to ask of you.)

Near this tenth anniversary of the disaster, we recall this history to note that taking the contrarian approach against the prevailing consensus may sometimes be a fruitful way to invest.

Clients, if you would like to talk about this or anything else, please email us or call.