It can be one of the most frustrating things for newer investors: you see the pretty little “Price Sensitive Announcement” bell on your broker app, excitedly click through to read the PDF, and see what by all indications looks like positive news.
You then take a glance at the company’s share price, and lo-and-behold – it’s red!
WTF?! But this was clearly a good improvement in revenue/new contract/resource discovery/etc.! What could possibly be the reason for the company’s share price to go down after good news?
Here are some of the main reasons why “good news” might not be “good enough” for stocks.
1. Already Priced-in
Has the share price of the company been consistently climbing in recent days/weeks/months on the back of no other substantial news? Especially if the valuation has looked like it’s well and truly started to outrun the company’s fundamentals/revenue/assets, or it’s hit a peak that might now be seen as unsustainable moving forward?
Then it’s likely people were already anticipating this announcement – or any others like it – in advance, and had already driven the price up as a result.
People will often argue this can sometimes also be because of a “leaky ship” (that someone had prior inside knowledge that caused the share price to run), whether or not it’s true.
This is what’s known as it being “already priced-in”. A.k.a: the news was not anything outside what shareholders/the market were already expecting prior, and the share price had already run hot previous to this as a result.
It’s typically the good news that pops up seemingly ‘out of nowhere’ and is entirely unexpected that leads to big green days for stocks.
If something’s already been announced/hinted at by the company as one of their key business plans/goals on their roadmap, or has been previously covered in the media, simply achieving them often isn’t enough to cause significant positive share price movement.
2. Result was merely “good”; people expected “great”
“Good” results are fine in and of themselves.
However, they’re usually not going to do anything special to the share price when the narrative has already been nothing but positive around the company prior to them being released.
Whether it’s obvious macro-economic factors working in the company’s favour (e.g: their core commodity price having run hard, or Covid lockdowns causing a surge in online businesses, or anything else along the same lines), or company-specific events such as previously-signed contracts or acquisitions now contributing extra to the bottom line…
…results often need to be exceptional in order to generate big share price moves. “Good” doesn’t cut it.
This is especially true in the case of larger-cap companies for which analysts have already forecast and re-forecast earnings upgrades to death.
If they’re simply “good” vs. the previous year/reporting period, then they’ll largely have been expected.
For example, if the company has a past history of increasing profitability by 10% each year, and in this news release they increased profits by 7%, technically it’s still “good”… but relative to previous results, it isn’t.
Shareholders may thus believe the company has somewhat “peaked”, and decide to take profits as they don’t think the business has much more growth left ahead of it.
This is actually one of the key arguments in favour of investing in small and micro-cap stocks (at least, those that aren’t already being discussed/memed to death).
You may be able to find indicators that they’ll release unexpectedly good results that the media or larger brokers haven’t already covered, which allows you to capitalise on the unexpected positivity.
Which leads us directly to…
3. Profit-taking; “sell the news”
The entire goal of holding individual stocks is to try and sell them at “peak value”.
Of course, timing the market is extremely difficult in general, particularly during quiet periods for a company. One of the only obvious indicators holders often have is the market’s direct reaction to pieces of positive news released to the market.
These mark a key time for shareholders who have been considering exiting their positions and taking profits for a while, to be able to take action when sentiment is at its most positive.
It’s not uncommon on days of positive news releases to see the share price of the company releasing the announcement to start out very “green”… only to then quickly fade to red as the day goes on as existing holders start selling out.
This is especially true for companies with a large % of retail holders who may have never intended to be holding their shares in the business for the long term.
It’s one of the main indicators in an infamous “pump and dump”, where people accumulate holdings (in micro-cap companies in particular) prior to an expected news announcement, only to sell out completely as soon as the news has been released.
Those buying in on such news can suddenly be left holding a stock bought at all-time-highs, which in turn can lead to…
4. A backlog of pent-up bagholders
Often times, one of the reasons when a stock releases positive news & the share price barely budges is because there’s been a ton of “stranded” shareholders who got caught in a previous price pump for the stock – and have been waiting for ages to be rid of their shares.
They may have lost faith in the company since originally buying in and seeing the share price tumble, but are so far in the red on the stock that they simply refused to accept such a large loss.
As a result, they’ve been waiting for a long time for any type of positive news to accept whatever meager reduction in pain they can, and sell off at the first sign of the price moving in a positive direction.
Thus they’re only too eager to pass on these ‘bags’ to new buyers, leading to the share price struggling to gain any momentum during the day’s trading action.
You can have a look at the Buy/Sell ratio on a stock during high-volume announcement day spikes such as this. Often there’s a massive queue of these bagholders that makes the ‘Buy’ number pale in comparison.
5. Looks to be a one-off good result that’s not repeatable
In general, the stock market is forward-looking. Reports full of numbers that sum up the most recent previous achievements, however, are not.
So while the raw revenue or sales numbers in a single positive announcement might appear great, you need to be conscious of other wording elsewhere in the report that indicates these numbers might not be sustainable.
It’s particularly true after a bumper year in which pretty much everything went right for the company, such as a one-off spike in sales, or a commodity price suddenly temporarily soaring.
These “perfect periods” certainly don’t happen often, and can lead to skewed numbers that aren’t going to be reflective of future performance.
Not getting distracted by headline figures is a key “skill” to investing, as companies will generally do whatever they can to accentuate the positive and hide the negative in their reports.
It’s the other stuff that slips through – phrases such as “upcoming tailwinds”, “uncertain environment”, “increased costs/declining margins” – that often tell the true story of where the company will end up in the next 6 to 12 months.
Hence, some holders may focus on these negatives instead of the headline numbers, and sell off as a result.
6. The announcement is “fluff”
Many companies – particularly those on the smaller end of the ASX spectrum – rely on pure sentiment to keep the share price moving.
This is especially true for those who aren’t actually yet producing any kind of product, service or goods, and have no revenue or profits to speak of which they can spruik to the market.
They then instead use the ASX’s announcements wire as more of a PR tool, in which releases full of vague wording, overly positive language, and general “pump-ish” sentiment is all that’s really contained.
Take particular note of announcements that don’t contain any concrete figures, dates or deadlines and instead use words like “planned”, “in the near future”, “soon”, “expected”, “upcoming”, “potential to”, etc.
While the ASX claim to police these kind of empty-calorie announcements – or at least flag them as non-price-sensitive – many companies have learned to game the system and make use of industry buzzwords to circumvent this.
More experienced holders/investors often will most likely see through this, and either avoid or bail out of the stock in response.
Have any other reasons for the share price dropping on good news? Let us know in the comments below.
