Why Did So Many Top Stocks Plunge After Reporting Great Earnings?

It was a trend that plagued the stock market this earnings season. Companies reported strong earnings, only to see shares plunge shortly after. Is this a new trend investors should expect to see more often in upcoming quarters?

In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Rachel Warren, Connor Allen, and Travis Hoium share their thoughts and discuss some top retail stocks for long-term investors to consider right now. 

Rachel Warren: A lot of retailers reported earnings this week. Two big names in retail, Target and Walmart both reported their earnings. Both companies reported strong quarterly earnings and revenue results that topped analysts expectations. But even so, shares of both companies fell. Both companies are focused on keeping prices low for the consumer right now, which is impacting their bottom lines and it's likely a driver for these price declines.

This is a trend we've been seeing, great quarterly reports, these companies are navigating the challenges with the current business environment well and yet negative investor sentiment reflected in these downward price movements.

Do you think this is going to be standard for companies reporting earnings over the next few quarters? Just quickly, is there a retail stock you think is a good buy right now? Connor, you take this one first.

Connor Allen: I have to say we're in a pretty weird environment economically right now because consumer spending over the past year has just been hitting all-time highs constantly yet consumer sentiment is continuing to go down.

I guess people are responding to these polls negatively even though they're spending all the money that they have in their bank account. But anyways, that being said, investor sentiment in retail is pretty weird and it's a confusing metric to look at right now, and I don't understand all of it.

But one retail stock that I'm interested in right now and have been for a while is Academy Sports ticker symbols, ASO.

Now, they have some high interest expense and they've got relatively high debt. It's definitely not what I would consider a rock solid business but anecdotally, I have to say I love it as a consumer. Financially, their net income and revenue have grown at 500% and 260% respectively since they IPO'd.

That's not too bad. Then some of the things that I just love about the company is our customer service, the product selection in their stores, and their store expansion. Those are all things that excite me about ASO.

Warren: Awesome. Awesome. What about you Travis?

Travis Hoium: I think these trends, it's probably going to be a little bit up and down. I think what companies are probably trying to navigate right now is during the pandemic when things like bars and restaurants were closed, people are spending all of their money on retail and specifically online.

Now we're maybe shifting a little bit in the other direction. I mentioned earlier that gambling numbers in Las Vegas are way up [laughs]. That's maybe a proxy for what's going on in bars and restaurants around the country. If you're Target or Walmart, what do you tell investors? You're maybe a little bit uncertain yourself about what's going on. The stock that I like and this has been the case for a while is Target.

The reason is, I think that what we're going to see long term is a lot more value on having that brick-and-mortar presence with a digital back-end. This is a company. This is the kind of product that we use all the time. I live in the Minneapolis area so sometimes we get to see where Target is going before the rest of the country and so I was an early user of their drive up or now I think it's called pickup service, where you just literally drive up to the door, somebody walks out with your stuff and puts it in your trunk for you.

It was like, this is what online shopping should be to me. It's much more efficient from a cost perspective than somebody literally driving to every house on the block from even an Amazon warehouse.

So from a pricing perspective, it should be solid. Target should generate pretty solid margins from them. I want to just go through a couple of numbers from the quarter because these are crazy numbers. Comparable store sales were up 12.7% at target in the third quarter, but their digital sales were up 29%.

Same-day services, which includes order pickup, drive-up, and ships, so these services that I'm mentioning grew 60% on top of 200% growth last year. Not only did we get a massive tailwind from the pandemic and people learning to shop differently, we're building on that. We're not going backwards.

If you remember, Amazon's numbers were actually pretty weak in the third quarter because they got this boom during the pandemic and then things slowed down. Target is actually accelerating, which I think isn't necessarily the way that we would naturally think about this as sales move online.

But I think with companies like Target and DoorDash, we're starting to see the value in, I want to make this purchase electronically on my phone and I don't want to go into a store, but I also want to have it in 15 minutes, not in two days. That's a trend that I'm really watching closely and I think Target is a great way to play that.

Warren: Yeah, no, I honestly when I looked at Target's quarterly results, I was very impressed. I think this is the same thing we've been seeing. A lot of these companies, they have a pretty great quarter. Target's done really well considering the supply chain issues and ongoing inflation.

I don't know if that some investors have unrealistic expectations or if it's just a general volatility in the market surrounding some of these movements, but it definitely was a strong quarter across the board. Another thing I like about this stock is it is a dividend payer. Yields about 1.4%, so a great company.

Hoium: Given that growth, they could have room to increase that payout if they want to.

Warren: Oh yeah. No. Awesome company and definitely one to watch, I think, within the retail space if you're not currently invested.