May 3, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of life insurer Prudential Financial (NYSE: PRU ) were getting hammered today, falling as much as 12% in intraday trading after the company reported first-quarter results.
So what: What's a billion dollars between friends? In the case of Prudential and its shareholders, it's apparently reason enough for a 10%-plus drop in the stock. In the first quarter Prudential lost nearly $1 billion as derivative positions moved against the company. Currency movements in particular, especially the Japanese yen's move against the dollar, were a big part of that loss, as they led to $1.5 billion of the $1.8 billion in investment-related losses. On an operating basis -- which excludes certain investments -- the company earned $1.56 per share, while Wall Street analysts had been expecting $1.72.
Now what: As anyone who was alive and not under a rock during the financial crisis no doubt knows, derivatives can be scary beasts. But sometimes they can end up having more bark than bite. While Prudential's quarter looks terrible thanks to those big derivative movements, it doesn't necessarily mean that the company has made bone-headed investments.
Under CEO John Strangfeld, the company has set its sights on improving return on equity for shareholders. Obviously, this quarter does not look like a step in the right direction, but investors may want to take a breath or two and make sure to consider the big picture as well as this quarter.
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