Giving Them the Benefit of the Doubt
Without a doubt, the most talked about performance of the day was from Oracle Corporation (NASDAQ:ORCL) and its near 10% loss. The $150 billion technology company had been trading with great performance throughout most of the year, but weak performance in key sectors created panic that cloud competition might be adding more problems than the company has admitted. The company obviously missed on both the top and bottom line, but software license, cloud subscription, and hardware product sales all missed expectations by a significant margin. Furthermore, the company’s guidance was short of expectations–so needless to say, there is a strong belief that the company is not quite as strong as some believed.
Historically, when Oracle Corporation (NASDAQ:ORCL) misses earnings to this degree, it is always a great buying opportunity. And with Larry Ellison at the helm and a forward P/E ratio of just 10.91, I am definitely buying on this weakness. With that being said, the earnings were bad, yet the company insists that the weakness is not due to macro changes, but rather a lack of execution on behalf of the sales team. Therefore, with years of great performance, I’ll give the company the benefit of the doubt–but if next quarter is bad I’ll start looking for bigger problems.
Great Growth But Still Waiting For Profitability
As the Dow traded lower, KB Home (NYSE:KBH) traded higher to continue its historic year of gains. The stock trended higher by 2.50% after announcing earnings that easily exceeded expectations. The company grew revenue by 59% year-over-year (yoy) and narrowed its losses as margin growth expanded. The company also showed strong performances in deliveries and orders, and prices were raised compared to the year prior.
One of the primary reasons that KB Home (NYSE:KBH)’s earnings were so good is because of the company’s land repositioning efforts, as its customers are seeking larger and more expensive homes. The company continues to grow fast, is fairly valued, and is now breaking even with operating margins and has positive cash flow. The only thing I’d like to see from the company is, of course, profitability. With that being said, the company is moving in the right direction, and although I think stocks such as Bank of America are better plays on the housing market, I also think that the stock could continue to gain.
Watch Performance May Be Seasonal, & Not a Long-Term Problem
The watch designer Movado Group, Inc (NYSE:MOV) saw a 10.48% loss on Thursday after the company reported better than expected earnings, but guided lower than the consensus. The company saw top line growth of 7.6% year-over-year, which was good, but now that we are looking ahead to the future, February data from Swiss watches obviously spooked investors.
According to the Federation of Swiss Watch Industry, there was an 18% drop in February sales for the $200 watch category. This category directly affects makers such as Fossil and Movado. However, those in the $300 category saw strength, which indicates that consumers are still buying nice watches and that the weak performance of Movado might be seasonal. Just last year Fossil lost about half its value with poor performance (around this time), but has since recovered nicely. As a result, the weakness from watch companies might be more timing related, and therefore Movado might be presenting value on this weakness.
Conclusion
When a stock trades drastically lower or pops significantly higher after earnings you must ask yourself, “was the news worth the movement?” Far too often we make assumptions based on performance, but the best investors are able to use stock movement as an opportunity to capitalize on value. Therefore, as I’ve discussed often, when it comes to earnings, read the report first and then assess the performance second, and you will find inconsistencies you can profit from.
The article Post-Earning Performances: Value or Value Traps? originally appeared on Fool.com and is written by Brian Nichols.
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