Results – Blow up or go up
The most likely thing to shock any shareholder and share price is company results. Results present a bi-annual moment of heightened risk for all stocks that report. We are coming up the Australian results season in August.
Thanks to continuous disclosure requirements (meaning companies ‘dump’ information at results) and high-frequency trading (some of which now hilariously detect adjectives in announcements and sells or buys in response to words like ‘warning’ or upgrade’), the results reactions can be surprising and savage. Multi-billion dollar companies, let alone smaller companies, can move 20% in a day on a results announcement in the first minute sometimes.
It is laughable of course, as if a high-profile fund manager like Fidelity (who are probably asleep in New York), or Australian Super (who are too big to do anything in the short term), has accurately researched, re-valued and decided to sell a company down to a new level in the time between the results announcement at 8:30 am and the market open at 10:00 am. They haven’t, they can’t, but even big stocks get smashed these days in the first few moments after results as if they have.
Thanks to the herd that now thunders around the market in the short term, and the computers that react to a whiff, rather than a sniff, or even a taste, the results season has become a dangerous time. Holding stocks in August and February (the two results seasons) is like running around in an orange vest on a battlefield during an artillery barrage, you’re never quite sure whether you’re going to get blown up. And there is a bit of luck involved. So, to protect you from standing on a landmine, here are the Marcus Today results season survival tips:
- Basic Vigilance. Find out when results are due for the stocks you are holding/trading. If you find a stock you hold is down 10% one morning after announcing results you didn’t know were due, it is a bit negligent. There are plenty of results diaries around. But Tip 1 is to find out when your company results are due. Don’t be surprised by announcements, there’s no excuse.
- History repeats. The most profitable game if you can get it right, is to guess which stocks are likely to surprise on the upside. They are often the companies that have surprised on the upside before, that have jumped on previous results or have recently had a positive earnings update. Go back and look at the last earnings announcement, the AGM maybe, a trading statement, a presentation, and see if the share price went up or down, whether it was positive or not, and whether brokers upgraded the next day or not. It is unlikely a company that has seen earnings upgrades running into results is going to disappoint, and there is an even better chance they will not disappoint. So Tip 2 is to check the recent announcement history. If there is a recent outlook statement, the risks are low.
- Avoid the bad. More than half the game these days is avoiding disasters. Don't bet on the unlikely, on a resurrection, on a falling stock. Don’t catch the knife. Don't swim against the tide. It’s not clever; it’s dumb. It’s a game of odds, not heroics. Tip 3 – don’t bet on results being surprisingly good when the history is bad. For most of us, results are about risk minimisation, not risk-taking.
- The share price trend is rarely wrong. Another very plain indicator of whether a stock is likely to surprise on the upside or downside is to look at the share price trend running into the results. The market is rarely wrong. Good stocks tend to do good things, and bad stocks tend to do bad things, and the results announcements perpetuate the trend they don’t end it. Results are very unlikely to turn the current downtrend into an uptrend on a sixpence. Tip 4 – Don’t bet against the current share price trend.
- Dividend stripping. The traditional trade is to buy big income-paying stocks like the banks and Telstra some 50 days or more before the dividend ex-date. This allows income chasing investors to sell on the day it goes ex-dividend and still qualify for the franking under the 45-day rule. Income stocks tend to outperform during the 50 to 70 days before the ex-dividend date. So dividend stripping technique number one is to buy 50+ days out from the dividend and catch the usual run to the results and the dividend. Tip 5 (bit late now) buy big dividend stocks over 45 days ahead of a dividend going ex so you can catch the usual rally into the dividend and be able to sell it the day after goes ex if you choose to, and in so doing still qualify for the franking under the 45-day rule (if that applies to you).
- There is a very safe way to strip a dividend. Rather than buy for the dividend before the results, the other income investor’s technique is to wait until the results are announced, not take the risk on the results at all, and if they are okay or good, buy the stock after the results and still collect the dividend that’s coming up. Its dividend stripping in full possession of the facts and avoids the gamble on the results. You can still hold the stock 45+ days after the purchase and qualify for the franking under the 45-day rule, and if the results are good quite often, the stock will trend up after the announcement as well. Tip 6 – If you want a dividend, wait to see if the results are OK and if they are, you can buy before the ex-dividend date feeling ‘safe’.
- Buy the bounces. Sell the shock drops. There is an academic study about shock drops and shock rises in share prices. The conclusion was that when it comes to shares, a stock that has a shock move up or down continues to move in that same direction for the next nine days. It’s the nine-day rule. In other words, if a stock has a good set of results and pops up 5%, don't say "I've missed it", just buy it because it is likely to keep going in that direction for a while. Sharp moves (up or down) tend to start trends not end them, presumably because after a company announces good results, sentiment improves, not for a day but for a while. The research the next day will be upbeat. Brokers will raise target prices and recommendations over the next week, fund managers make decisions slowly, it takes a while for the news to be discounted. In other words, there is money to be made buying stocks after the results even if they have popped. You may miss the first day and the best day, but you'll catch the next few days of trend, and your risk is much lower than punting ahead of the results. Tip 7 – Buy stocks that pop and sell stocks that drop on results (but maybe don't sell on the open – see Member email below).
- If in doubt, get out. There is only one way to guarantee you avoid landmines. Don’t stand on them. Some small company investors never hold stocks over results. So what if you miss the odd good bounce. Far better you avoid disaster than profit from luck.