John wrote:Higgenbotham wrote:
> Right, so to get a complete feel for how earnings are affecting
> stock prices, it would be necessary to track the effect on the day
> earnings are released, then follow up to see if the companies are
> generally taking advantage of that average 5% dip on the day
> earnings are released (that the analyst notes in the article I
> posted earlier this evening) to put their excess cash to work
> buying back shares starting two days after earnings are
> released.
So if I'm correctly interpreting what you say, then other investors
would have two days to buy the dip, which would push prices up and so
stock buybacks would no longer be cheap. Conversely, if no one buys
the dip in the two days, it must mean that investors think the stock
isn't worth much, and so the company might as well do the buybacks in
the hope of convincing investors otherwise. Right?
I'm not sure how the companies deploy their buyback commitments. In other words, the language I see describing buybacks talks about so many dollars of commitment over so long of a time period. My understanding is that allocation becomes fixed once it is committed to. I think they then try to get the shares as cheap as possible within the allowed window.
Back to your comment. My observations aren't all encompassing because I filter most stocks out and never look at them. The stocks I filter out tend to be stocks that have buyback programs because buyback programs tend to raise share prices higher than they ought to be. In my limited observations, if someone tries to categorize what happens, three things can happen when a stock gets hit on earnings news:
1. The stock gaps down and is immediately bought the first day (often hot momentum stocks);
2. The stock gets hit for two days and then recovers (often stocks that are good value); or
3. The stock gets hit for two or more days, stages a brief recovery, then goes down more after that (often stocks that have or are falling into disfavor).
"So if I'm correctly interpreting what you say, then other investors
would have two days to buy the dip, which would push prices up and so
stock buybacks would no longer be cheap..."
These tend to be the hot stocks. They probably weren't even cheap when they dipped and were reflexively bought.
"Conversely, if no one buys
the dip in the two days, it must mean that investors think the stock
isn't worth much..."
These tend to be more value stocks and I'm often amazed to see how much these stocks can get pummeled on great or decent earnings before cautious value investors will step up to the plate. I have no idea what Phillip Morris earned but it might be astonishing to see the pounding that stock continues to take, even if the earnings were decent, once that pounding has commenced and the herd starts mindlessly bolting through the crowded theater while cooler heads look for bottoming signs and cautiously buy a little.
