What gives, when profits rise, but share prices fall?

Overwhelmed by earnings season ups and downs? Here are some tips to help investors ride the waves and prosper in the long term.
The post What gives, when profits rise, but share prices fall? appeared first on The Motley Fool Australia. –

Chalkboard Graph Up Dow

Confused by some of the share price reactions during earnings season?

You’re not alone.

So here’s a reminder of how it works:

Sometimes, profits go up. And the share price falls.

Sometimes profits go down. And the share price rises.

Sometimes, profits and share prices go in the same direction.


No, it’s not as random or clueless as it sounds, but it does take some explaining.

And the answer is in two words: ‘expectations’ and ‘outlook’.

Let’s take them in order.

Say your company delivered strong growth, with profits up 25%. 

That’s good.

But if the company had provided guidance for 50% growth (or the market, feeling optimistic, had factored in 50% growth in the absence of company guidance), a 25% lift in earnings will be underwhelming.

So, a market prepared to pay $1 per share for 50% growth might only pay 90c for the lower actual result.

Hence: profits up, share price down.

And yes, you can reverse the situation:

Assume the market thought another company was in for a tough time. Shares had been trading a lot lower, on the basis that profits would be down 40%. But, in the event, the company did better than expected, and profits only fell by, say, 20%.

The share price might jump, as investors recalibrate their expectations for ‘bad, but not as bad as we feared’.

Hence: profits down, share price up.

(We’ll assume for our purposes that ‘profits up, share price up’ and ‘profits down, share price down’ are a little more self-explanatory. That’s not always the case, by the way, but that’s a discussion for another day.)

What about when profits are as good – or better – than the market expected, but the share price still falls?

That can be a case of ‘outlook’ being the Grinch at this particular Christmas party.

For example, a business might have had a good year last year (or last half), but that was due to one-off or temporary factors. So, it’ll say ‘hey, last year was great, but don’t expect it to last’.

Or it might be that given we’re getting towards the end of February and the books are closed off in December, the last 8 or so weeks have been underwhelming.

In that case, even though the reported numbers are real, and might be impressive, the market is (very reasonably) looking at more recent trading and factoring in that poorer performance.

So, yes, even when profits are up, and as good or better than expected, a share price can still fall.

And similarly, you’ll often see an ordinary set of numbers be passed over by investors, based on real and (hopefully) sustained recovery being shown in the last couple of months.


As crystal, or as mud?

If it’s the former, great.

If the latter, please do yourself a favour and re-read what I’ve written, above.

Because, as an investor, the sense of bewilderment when a share price doesn’t follow profits (in the short term, at least) can be pretty demotivating, sometimes.

It can make you lose confidence in yourself and faith in the market.

You can start to wonder if you’re really cut out for all this.

Pro tip: You are.

And, if you need it, here’s the good news: Over the long term, it’s almost invariably true that short term bumps and surprises are evened out.

Share prices, over a long enough period of time, follow business performance. And the longer your investing timeframe, the more likely that is to be true.

Some people learn to make their peace with volatility. Others just learn to ignore it, or endure it with gritted teeth.

What I know, from my own experience and the experience of others, over decades, is that buying quality at a reasonable (but not necessarily dirt cheap) price, being diversified, and having a long term perspective, is the best way to ride the waves of earnings season.

Which doesn’t necessarily make it easy – at least at first.

But give it time (and grit your teeth if you need to).

You’ll get there!

Fool on!

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of February 15th 2021

More reading

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post What gives, when profits rise, but share prices fall? appeared first on The Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!