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A Tale of Two Stocks
byRick Pendergraft
05-07-2007 |
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Article:
Over the past two weeks, we have seen numerous companies report earnings.
Most have been better than expected, with a few exceptions.
There are two companies that I want to discuss that both beat earnings, but
had different reactions. Both companies are in the Internet sector, but in
different businesses within the sector.
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The first company is Google (GOOG). In my article two weeks ago I mentioned
how investors and analysts were extremely bullish on Google and that I would
take more of a bearish stance toward the stock. Analyst ratings showed 20 out of
20 rated the stock as a "buy" and the short interest ratio was less than one.
When GOOG announced earnings on April 19 and beat the consensus estimate by
38 cents, I thought I had made a terrible call on the stock, especially when I
saw the stock gap almost 20 points higher the next day. However, it turned out
not to be as bad as I had expected, as the stock moved lower throughout the day
and only finished higher by 11 points. Granted, it was the wrong way, but GOOG
was only 2.3 percent higher by the end of the day.
The bottom line is this: GOOG announced great earnings (11 percent higher
than the estimate) yet the stock only garnered a gain of 2.3 percent. The buying
pressure was minimal because the sentiment toward the stock was too optimistic
and the stock was overbought.
The second company is Amazon.com (AMZN). AMZN announced earnings last Tuesday
night and beat analyst estimates by 11 cents. The sentiment toward AMZN was
drastically different than that of GOOG. Analyst ratings were anything but
optimistic, with four "buys," six "holds," and three "sell" ratings. The short
interest ratio for AMZN was a whopping 6.8.
The rea ction AMZN stock had was dramatically different from that of GOOG.
AMZN gapped over 18 percent higher on Wednesday and instead of pulling back
throughout the day, the stock continued to move higher as the day wore on,
finishing an incredible 26.9 percent higher.
AMZN was overbought heading into its earnings announcement, just like GOOG.
But the sentiment was very pessimistic toward AMZN and very optimistic toward
GOOG. This is why the reaction to earnings was so different. In the case of AMZN,
there was considerable buying pressure on the sidelines and it hit with a
vengeance after the earnings report. GOOG had little buying pressure on the
sidelines and it only managed a small gain.
I did not write about AMZN two weeks ago, because it was not releasing
earnings that week. But last Monday, I recommended calls on the Internet HOLDRs
Trust (HHH) to subscribers of the ETF Options Trader. Because AMZN is one of the
three largest holdings in the HHH, subscribers benefited from this move in AMZN.
I have written about sentiment before and I hope I am getting the message
through. Adding sentiment analysis to your arsenal can enhance the fundamental
and technical analysis you are doing. It tells you how much buying pressure is
on the sidelines and gauges the potential reaction to events such as earnings.
Happy Trading,
Rick
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