Earnings Up, Stock Down?

“Perhaps you could explain to me something that sounds like a mystery to me (I am sure there are many more) but which may not be at all. I have owned a few Sony Corp shares (SNE) for the last couple of months. Yesterday, Friday 05/08, I receive a newswire saying that Sony hit record consolidated sales, pretax profits, and net profits, listing a plethora of highest-of-all-time double-digit etc. etc. What is the result of all this? I’ll tell you … During a strong day on NYSE like yesterday, the stock fell 0.62%. I was quite stunned! Should I be so? Is this normal?” – Fabrizio Manopulo

The first thing they used to teach new hires on Wall Street was “buy on the rumor, sell on the news.” (“The first thing I remember hearing,” says my full-service broker, “is buy on Rosh Hashanah, sell on Yom Kippur” — reason enough to pay $245 for a trade you could do for $8 here, don’t you think?) The point is: Since everyone wants to get a jump on everyone else, the time to buy something is when you think there will be good news, and the time to sell it is when the news is announced and folks new to the market, who assume good news is good news, rush in to buy the stock.

It doesn’t always work this way, especially if the good news is even better than expected, but that’s basically the key, at least to short-term price movements. It’s not how good or bad the news is that counts but how that news compares with how good or bad people expected it to be.

Of course, if you are buying SNE to hold for the next 20 years, because it’s a great company and you believe in its future, then how the market reacts to any given quarter won’t make much difference. (And I’m not sure they even celebrate Yom Kippur in Japan.)