We’ve all heard the term that the capital markets are efficient, but in my opnion they certainly aren’t rational.
I’ve been involved with numerous publicly traded companies, and I’m always shocked when earnings and revenues increase, but the stock takes a hit because it “falls short of expectations.”
Recent case in point, from today’s news:
“3M Co. on Monday reported a 12 percent gain in first-quarter earnings, but its shares fell 6.1 percent after the maker of Scotch tape, Post-it Notes and industrial and health care products said sales were below forecast. Shares of the Maplewood-based manufacturer closed at $75.90 a share, down $4.96. Although revenue rose 4.6 percent, to $5.17 billion, it fell short of the $5.26 billion that had been forecast, according to the average estimate of analysts surveyed by Thomson First Call. The revenue gain was the smallest for 3M since the third quarter of 2002.”
Yeah, you read that right. Because revenue missed by 1.8%, even thought earnings roared, the capital markets devalued 3M. I’m could lead a case for arguing against efficiency, but this certainly isn’t rational.
Stock prices are reflections of future revenue and earning expectations in current time. When a company reports positive quarterly earnings, without the presence of a one-time event such as the sale of a dog-division, with a record-setting upward trend, that tells me that management and operations are in synch and future expectations should be raised.
Taking a 4.6% hit on the heel of good news isn’t rational and doesn’t reward management or employees. Instead, it causes management to look outside the corporate window and focus their time on managing Wall Street, rather than managing a business. As a shareholder of the business, I get frustrated when a company performs outrageously, and then gets hammered because a couple analysts on the Street decided to downgrade or warn.
It just goes to show that your stock and share price isn’t necessarily valued by the performance of the company, but instead by the perception of a select group of people, who have likely never run a business in their life.
I can tell some Best Buy stories if y’all are interested.
Stop Yer Whining!
Why complain about this and instead take advantage of it. If the company’s doing well, buy the stock while it’s down! Laugh at the other morons whilst you sell your stock for that private Mediterranean isle!
Seriously, you would think that with the global information network we have now, we could seriously start to predict the economy and its related markets, etc. But it’s still affected by human emotions (see: Oil Prices).
I wonder if any of the people on Wall Street who under-valued that stock have any clients who bought a lot of 3M stock recently? Something the SEC should look into.
My $.02 Weed
Stop Yer Solutionizing!
Hence, my Best Buy story…
There were people working inside the company that decided to use inside information on sales to purchase stock in advance of earnings announcement. Holiday season is the biggie for retailers, as we all know, and one season in particular was going gangbusters. So, these individuals decided to play the timing of the market, and buy some stock, right before strong earnings were announced.
They were a little ticked off when the stock price didn’t respond according to the business performance.
Best Buy made a lot of people wealthy overnight (really, a couple of years). People went from being secretaries at a small, regional retailer, to wearing lavish diamond rings on their fingers and having millions at their disposal. EVERYONE inside the company watched the stock price fluctuate on the hour…and tried to trade on inside information. I remember one day where people ran around the building, freaking out when the share value dipped a significant %. In fact, management that had their annual bonus tied to public valuation, made some wacky decisions (IMHO) just to game the quarterly return so they could ring in a big bonus. It’s all about short-term returns and the market doesn’t respond the way they expect.
Hence, you can’t take advantage of it, even when you have the information, because markets don’t act rationally.
How Interesting
So…the irrationality of the markets and economy help prevent unscrupulous people from taking advantage of it.
Let me see if I have this right: 1) Stock is sold to raise money for a company. You’re selling a little piece of ownership in a company in order to raise capital 2) Once this is done, the value of your company is solely determined by stock prices? Regardless of income and holdings and profit and all, you’re corporate worth is based on what price people are willing to buy your stock for? 3) That can’t be it all, can it? Who pays you when you sell stock? The company? So if everyone who owns IBM stock decided to sell it, IBM would be forced to pay out a large sum of money? Then the price would plummet, and IBM would be worth a pittiance?
I understand that would never happen, because the rational people out there would buy the stock in a second, but is that the way it works?
To go public is a risk because you can make a lot of money, but you put your worth in the hands of Joe Stockbuyer?
Wow My $.02 Weed
Equity & Debt
Corporate valuation is determined by both equity and debt, as well as cash flow. Thus, the price of outstanding stock is not the determinant of a business’ value.
When you trade a stock in the open market, the company is likely not involved. On the trading floor (NYSE, NASDAQ, etc.) stock is traded between two entities.
In the words of Tom Stoppard, “every exit is an entrance to somewhere else.” This is true of stock as well. Every seller has a buyer. Which means that if everyone decided to dump their IBM stock, someone else has to buy that stock. The thing to recognize is that Weed Q. Public is not a major player. Most holders of the 30 bellweathers that constitute the Dow Jones are institutional holders. For example, the California Teachers’ Pension Fund is one of the most influential stock players in the market. Same with Berkshire Hathaway. These guys will own large amounts of equity in a business, and their trades send shockwaves through the market.
To go public is not a risk — it’s an exit strategy for most businesses. It’s the big payoff for early investors. And going public doesn’t put corporate worth in the hands of Weed Q. Public. My assertion above is that going public puts stock worth in the hands of analyst camps on Wall Street who have likely never run a business in their lives.
The dialog that Wall Street uses to describe the performance of a business is WAY different than the dialog internal management uses to run their business. Putting it another way: it’s like the difference between IT people discussing software and the Sales team discussing software.
Hmm
So if there’s a selling spree on Wall Street, say for example, after the Enron fiasco. If there’s an equal amount of buyers for sellers, then will the stock price stay steady or plummet?
Are there situations where nobody buys stock? Does that mean you can’t sell it? Or by the time you can sell it, the price has dropped so low you lose any possible gain?
I would think good businesses only factor Wall Street into part of their busniess decisions, but with your Best Buy story, it seems some businesses worry too much about that over the health of the company.
Is there any chance of reform for corporate executives, meaning will there still be $100 million dollar golden baskets for execs who have done nothing but run businesses into the ground?
My $.02 Weed
The Stock What?
Well, I know about as much about the stock market as I know about, well, computer technology. But I *have* been listening to Marketplace on NPR, because it’s an interesting approach to financial news, and since I’m now a “grown-up”, I feel like I should take some sort of interest.
Anyway, they did a story last week about how much thought goes into the valuing or devaluing of a particular stock, and that it’s much more than simply revenues. They used the example of Apple, which announced record profits last week, but still saw a decline in stock price. The reasoning, according to the reporter, was that stock analysts not only look at current profits, but they take guesses about possible future revenues. In the case of Apple, the analysts see the success of the ubiquitous iPod as a sign of oversaturation. As more and more people buy iPods, the potential market shrinks. And once everyone who wants one owns an iPod, Apple may be up a creek. It appears that new features like additional storage and photo capabilities aren’t convincing iPod users that the ones they own are obsolete.
Additionally, while Steve Jobs is hinting at new products on the horizon, he has given no details. Apple is, at this point, a one-trick pony, and when that trick runs out, stock analysts predict a drop in revenues. Hence, the stock is devalued.
Pretty interesting, I thought.
— Ben
I Met My Friend From 3M
Last night I met up with a friend from 3M, who also freaked about the market reaction.
Sticking around and waiting for vesting is such a gamble, especially when the market hammers favorable results!