HAUKE: Lofty expectations sting some high-profile stocks

IBM Corp. just announced great quarterly earnings. So did Apple Inc., JP Morgan Chase & Co., and Google Inc.

Not only were earnings great, in each case the companies beat expectations. But an even bigger surprise awaited investors after the earnings reports. And, with the exception of Google, the surprise wasn’t as welcome.

One day before JP Morgan released earnings, its stock was up almost 2 percent.

IBM celebrated a more auspicious occasion the day before its earnings were released when the stock hit an all-time high of $143.03 per share. This new high-water mark saw the stock break above the previous high set way back in early 2000, before technology stocks got smashed. IBM is one of the few tech stocks that has surpassed its technology bubble peak of early 2000. In fact, Microsoft Corp., Oracle Corp. and Dell Inc. would have to double from current stock levels to match that milestone.

And you would have to be living under a rock to have missed the way Apple stock has been moving the last few months. Apple’s earnings report was filled with more great news as the company continues down the path toward global domination.

Despite all the wonderful news, each of these companies saw their stock prices fall after the earnings came out. JP Morgan was down almost 8 percent and IBM fell about 4 percent. Apple was also retreating from its recent highs.

How can this be? How can the company report great news only to have the stock drop immediately after? Even the most savvy businesspeople ask this question all the time. Sometimes the inner workings of Wall Street confound the wily and the wise.

There really is a simple explanation, though. In the three cases where the stocks fell after the news, short-term traders were saying the great news was not great enough. The stocks rose so much in the preceding weeks that the earnings would have to be rare, one-of-a-kind events in order to keep the price moving up. These are all classic cases of “buy the rumor, sell the news.”

Google, on the other hand, went through an entirely different experience. The stock was actually down a little the day before the announcement. The stock had been underperforming. That all changed a few days ago with the earnings report.

Apparently, Google caught a lot of investors off guard because the stock jumped 11 percent after the report.

I know, it’s Bizarro Land!

These counter-intuitive events are all over the stock market. Back in late 2002, oil was selling for a little under $20 a barrel. Over the next five years, it soared to almost $150. With energy prices moving that high, experts told us not to buy transportation stocks. Instead, the Dow Jones Transportation Index was one of the top-performing sectors during that entire bull market.

This all boils down to matching popular trades with current expectations. Or, unpopular trades with the lack of expectations. Un-herd-like behavior is a much more intelligent investing method than buying Apple the day before earnings after the stock has been up 20 percent over the last few months.

Other thoughts

This is still bothering me. U.S. government bonds are an incredibly high-risk investment today. These things are in a bubble and unsustainable for the long term.

Today, the biggest buyers of U.S. debt are citizens and institutions. It would be a shame if our own government ends up burning the American people with these bad investments, but it looks like that is exactly what is going to happen.•

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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.