When earnings season comes, volatility often comes along with it. It's important to get yourself in the right mindset to deal with price swings. In this Fool Live video clip, recorded on May 3, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser have you covered.
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Jason Moser: Question here from Siobhan. This is a good one because it's a bigger-picture question, but it's one that we get from time to time and talk a lot about because you can't fully make sense of it, but Siobhan asked, ''I have a general question. Why do stocks go down after earnings? Is it the institution pumping and dumping at the same time and taking profits out of the next trading day? Are they trying to create a fear of missing out? For example, Apple beat their earnings, Amazon beat their earnings.''
Matt, we see this from time to time. A accompany drops, a great quarterly report. The numbers are all just mind-blowing, and then you see the stock going down the next day. There can sometimes be an explanation for that and sometimes not. I don't know, what do you think?
Matt Frankel: That's a really tough thing to generalize. A lot of times you really have to dig into a company's earnings report to figure out why it's going up or down. AmEx (AXP -0.29%) was a great example that we just talked about. The stock went down after earnings even though on the surface it look great, but their revenue was white. The CEO gave some comments about how travel and entertainment were still pretty weak. The bottom line is there's literally hundreds of different factors that can move a stock after earnings. There's a lot in it. If a stock goes down after earnings and I don't see anything really wrong with the report from a long term investors perspective, I tend to think of it as a buying opportunity. When AmEx went down after earnings, I thought that was a buying opportunity.
Frankel: Whenever any of my favorite stocks miss this and go down afterwards, or better yet, have a great report and go down. I think Apple popped right after earnings but immediately took a nosedive.
Moser: You buy the dip.
Frankel: Yeah, definitely buy the dip, if nothing has changed from a long-term perspective.
Frankel: If the market was expecting $50 billion in revenue next year and they guide for $49.5 and the stock goes down, that's a buying opportunity.
Moser: Yeah. Investing is about the future. You've got any little thing in a call where analysts or investors can nitpick and say, this next quarter or this next year, this company is going to be spending more than we thought they were going to be spending and margins are going to be impacted by this. That's genuinely the short-term versus long-term approach. That's the difference between the two. It's not always easy to spot, to explain, or to rationalize, but that's why we invest the way that we do. Because typically, when you're talking about good businesses, one quarter doesn't make or break a good business. Oftentimes, even if a business is going to, say for example, that they're going to be investing a lot over the course of the next year, if that investment is meant to bolster sustainable and meaningful top-line growth, that investment eventually will stop. You'll be able to realize more on the bottom line when that investment stops. But if it results in that sustainable and meaningful top-line growth, then usually, it's going to be worth it, assuming they're able to pull back on that investment and realize those savings down to the bottom line. It's just a matter of taking that longer view, if you can hold that patience.
Apple and Amazon, two very good examples there in that, having gone through both of those quarters. Now will be the first day they were stellar, by virtually every measure. But you take into consideration the fact that they're coming off of some crazy comparable here with the past year. You've got Jeff Bezos, for example, he's going into what is his last quarter, I think as CEO of the business, Apple, are they going to realize the same iPhone tailwinds that they realized in the past. Just all sorts of questions that are brought in to play for shorter-term investors, which don't necessarily bother us as much. That's why you focus on the business and not the after-hours reactions because they're two very different things.