Hot off the Press!

Press releases, Rumors, Analysts and Earnings

How does a trend start and what keeps it moving that direction?

 It’s all about perception; company generated press releases, rumors, analyst opinions (upgrades and downgrades), articles published by buy side or sell side authors, and of course earnings all contribute to the direction, duration and strength of a trend.

We know that buyers and sellers move a stocks price but it’s the mass perception of a story, rumor, analyst opinion or earnings that move the stock and get people’s attention. How compelling the story is or how strong the earnings are and how they are perceived by the masses that will determine the strength of the trend.

A perfect example of perception and how it impacts stock price is the legalization of marijuana for recreational use in Colorado. There are whole group of new startups, mostly penny stocks that have emerged and claim to have the inside track on this new and dynamic industry that is sure to reap billions in earnings for the early adapters and first to market. The story is so compelling that many of these names have absolutely zero earnings, tons of debt and yet they trade at insane valuations on the perception that they will grow into those valuations because the industry is just getting started. Everyone wants a piece of the pie and they are willing to risk their hard earned capital to be part of the story.

I recently had a close friend that knows how involved I am with stocks call me and tell me how he is making a killing on this “Pot Stock” PHOT. He had bought it @ 19 cents and it was already at 50 cents. He felt it was just getting started and wanted my opinion since he was planning on doubling down on his position. I told my friend that he needed to be careful and instead of doubling down he should consider booking some profit. The stock was trading below a nickel only a few months prior and was now trading up over 1000% on perception. There were no earnings to justify this incredible move. It was all based on speculation along with some buy side fluff pieces published by the company and individual authors. Unfortunately my friend decided that the story was just to compelling and doubled down without booking any profit. A week later the stock went to .77 cents a share and looked as though it was heading to $1.

My friend and I spoke again and he went out of his way to let me know how well his pot stock was doing. Once again I suggested that he consider booking some profit and reap the rewards of his good trade before the story changes. He was steadfast in his belief that this was just the beginning and it would be a one way ticket to early retirement as a multi-millionaire. The stock began pulling back to the 50 cent level which also happened to be its 50 day moving average after peaking out @ .77. Then the unthinkable happened and the SEC halted the stock to investigate some trading irregularities. It remained halted for 10 trading days and once it reopened it began trading @ .20 cents, then went as low as 10 cents and currently sits @ 18 cents. I have not spoken to my friend but I am confident that not only did he lose all the profit he was sitting on but he is now sitting in a losing position.

      

Fundamentals Matter if you are going to hold a stock overnight

Was my friend being too greedy? Did he get caught up in a Pump and Dump campaign?

I have no opinion on whether PHOT is a viable business or whether it will eventually be able to produce tremendous earnings. I simply do not know enough about them or their business. The reality is earnings do not exist for them today and there was nothing substantial to drive the price higher. The move was based on emotion and hype. Day traders and momentum traders thrive on these types of story stocks because they recognize them for what they are. Trading vehicles that can provide explosive returns in a very short period of time but they also recognize that these events are usually short lived if there is nothing material behind the move.

I am not suggesting avoiding story stocks, some traders make a killing off of them. What I am suggesting is that you know the difference between a “FLUFF PIECE” and something “MATERIAL or SUBSTANTIAL”. A company that reports better than expected earnings and raises their outlook for the remainder of the year by a wide margin would be considered substantial. A company that reports it has become cash flow positive and is on the road to profitability in the next couple of quarters is substantial. A company that reports that the industry they are entering is a mutli-billion dollar opportunity that they could potentially get a big piece of would be considered fluff.

An author that writes an article based on his opinion is a “FLUFF PIECE” and often written for a “PUMP and DUMP Campaign” or it can be an attempt to derail a stocks accent as a “HIT PIECE” that is part of a “Short and Distort Campaign”. You can differentiate these articles from legitimate stock analysis by paying close attention to the claims that are being made and whether or not they are using facts and fundamentals to support their thesis as opposed to supposition, hearsay and opinion.

Companies themselves can also send out Fluff press releases designed to inflate the stock price so they can sell more shares and raise capital, diluting the shares of the existing stock holders.

It’s important that you check the balance sheet of a company that reports some FLUFF before you go jumping in. Many small cap companies and biotech’s use this strategy to refill their coffers just to stay afloat.

Companies will also release some fluff prior to their earnings release to give the illusion that their earnings may be better than expected. This can give the stock price a dramatic rise into earnings, only to be taken down again when the actual earnings hit.  This is called a “buy the rumor and sell the news” event. Earnings reports can be deceiving and a big disappointment if the stock has already made a strong move in anticipation of a good report. Even if the earnings are strong the news has already been priced into the stock and if they fail to raise guidance or merely guide in line with the street expectations then the stock is likely to stay flat or pull back.

Analyst upgrades can also move a stock but they too can have a hidden agenda. I can't tell you how many stocks over the years I have seen analysts raise to a buy or lower to a sell and have the stock react initially in that direction and then do the exact opposite. 

Jim Cramer often gives buy and sell recommendations every day on his show, Buy buy buy >Sell sell sell > and it then has the CRAMER EFFECT where it will make a move the following day. That move often fades in a day or two. Cramer hated two of my biggest winners the entire MPEL and MVL Marvel Enterprises which was bought by Disney for 55 bucks a share. The whole run up in Marvel people would call into the show and Cramer would say SELL SELL SELL. However when Disney finally bought them for 55 a share. The management at Disney were geniuses for paying up to acquire Marvel.

A recent buy recommendation was SD when it was near 7 and now sits below 5. My point is that no one really knows what a stock is going to do. I actually like SD as a long term turnaround story but it was a bit extended @ 7. Be skeptical of analysts with firms that have investment banking relationships with publicly traded corporations. Davide Faber actually wrote a pretty interesting book "The Faber Report  How Wall Street Really Works an How you can make it work for you". It opened my eyes to a lot of things that take place in the analyst community.

“Sand bagging” is another tactic that can be used by companies. This is when a company intentionally lowers expectations of forward guidance so they can handily beat expectations in the following quarter. It’s the under promise and over deliver setup.  Over the years I have learned the hard way not to hold stocks overnight into binary events like earnings unless I have done some real due diligence and am planning to hold it for the long term.

Day traders and momentum traders aren’t normally concerned with the fundamentals they are paying attention to the price action and the technical set ups. Swing traders, position traders and long term investors place fundamentals above technical. Day traders and momentum players would rather sit on the sidelines through an event like earnings and look for a setup after the event. Swing traders and investors often hold through these events if they have enough conviction that the fundamental story remains intact and that the dominant trend will continue.

Dominant trends can stay intact until something meaningful contradicts the mass psychology. It must be an event equal to or greater than the previous perception in order to change the trend of a stock.  An SEC investigation or a compelling article on accounting irregularities, earnings miss with lowered guidance and heavy insider selling could all change the dominant trend of a rising stock. An earning’s beat with raised guidance and heavy insider buying could be the catalyst to break the dominant trend of a falling stock and start a new trend higher.

Always remember that earnings and fundamentals are only as reliable as the companies that present them. Enron, WorldCom and a host of other names appeared to be on sound financial footing yet turned out to be some of the biggest scams ever encountered by the investment community. Being skeptical of press releases and articles based on hype and opinion can give you the upper hand when it comes to trading. 

Don't Let Yourself Be Part of this Crew!!