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What Should You Do When Your Favorite Stock Takes a Big Drop After Earnings?

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It just might be the exact opposite of what you're thinking.

When a company's earnings report is released to the public, it can sometimes lead to big swings in the stock price (both up and down). Over the past few weeks, investors have seen Zoom Video Communications (ZM 5.89%) and Lemonade stock prices take a dive as short-term results disappointed market analysts. On a Motley Fool Live episode recorded on March 3, Fool.com contributors Brian Withers, Jason Hall, and Jamal Carnette discuss what to do when one of your favorite stocks takes a hit after earnings.

Brian Withers: Yes. There's a number of questions like Zoom. "Can you break down the Zoom movement this afternoon, almost 20% swing," and there's some questions about Lemonade dropping. Generally, when I look at all of these stocks that have taken a step back, they're up significantly over the last 12 months. We joked about Zoom's forward-looking guidance, and I've seen this consistently. We've gone about a year with companies getting off the hook providing guidance, and now all of a sudden, they provide reasonable guidance with still an uncertain environment, and [laughs] they get punished for it. It's a little bit of the stock market game.

I know it's super frustrating if you bought Lemonade at $150 or whatever and now it's $110. But as Jason said, I look out five years and 10 years and Lemonade is a much bigger company and they're still getting their feet under them. This is a good time to just watch and learn and look underneath the business and who's running it and what decisions they're making. Then add to the stock if you feel comfortable with it and you can get it at a lower price.

Jason Hall: Sometimes, you always see more volatility around earnings, and sometimes, it's easy to mistake what a bunch of traders or even some long-term investors might be doing with anything the company actually did. Sometimes, people are just looking for an excuse to act. Sometimes don't look too hard, I think it's the big one there. Jamal, you see any questions and here you want to grab?

Jamal Carnette: Yeah, I'm going to ping off that. I like these behavioral-type questions because I think in the long run, those are the ones that are going to add the most value. I see one from Matt that says, "When you say hold your stocks for three to five years, does that also mean you don't sell certain lots of them throughout your ownership as the stock price fluctuates?" I'm going to answer to this question as a normal rational Fool[ish] investor would.

Fully admitting that there have been times where I've fallen victim to hesitant selling or anything like that. I think, ultimately, when you see stock fluctuations, the key is for you to take that long-term perspective, that three- to five-year perspective, and if there is a very large movement one way or the other, oftentimes, take advantage of that. Like we've said with Zoom today and others, they've sold off when the long-term fundamental story remained sound.

The best way and the way that brings the most long-term wealth is to take advantage of those situations to add shares or, if you view, as I said the long-term story as being sound, take advantage of Wall Street's myopia and look at perhaps buying more shares than perhaps selling.

We don't want to be the type of firm that encourages short-term trading, racking up large tax bills. We answered the question, and what I try to do, fully understanding that investing is also an emotional component to it, is to look at those as opportunities to buy more shares and to stay focused on that long-term opportunity.

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Stocks Mentioned

Zoom Video Communications Stock Quote
Zoom Video Communications
ZM
$94.59 (5.89%) $5.26
Lemonade, Inc. Stock Quote
Lemonade, Inc.
LMND
$19.79 (-4.53%) $0.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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