Does the market get it right day 1?

Last reporting season, stocks that “beat” were up +3.10% on the day, and then added an extra +13% to be up +15.7% 4 mths after reporting. The ASX 200 rallied +6.2% over this same time. These stocks had a “lower short interest” at 2.1%, versus 3.1% for the misses. The Misses were smacked -7.2% on the day they reported but the misses have improved by +9% to be (4 mth later) now up +1.5%. But they have been helped significantly by the fact that the ASX 200 rallied +6.2% in the 4 mths since that Aug Reporting season to 15th Dec 2017.

Here is a breakup of the 311 stocks that reported beats, misses and in-line results in August 2017 reporting:

Does the Market get it right on Day 1 of a Company Reporting?

However, Beats & Misses can be called arbitrarily: i.e. I may think that a stock that beats on EBIT may be a beat but another may say it’s a miss as the guidance was lower than expected. So to eliminate any human judgment or prejudice. I’ve looked at the stocks 1st-day reaction to the result, to ask: Does the market get it right on day 1? 

And if so, what does that tell us about: How to interpret the market reaction on day one; What the day one action implies for the stock going forward; is there any consistency in how stock reacts after Day one & then over the following 4 months; and whether the short interest tells us anything.

I have done a ton of work on this in the Feb 2016, August 2016, Feb 2017 & the August 2017 reporting season. The table is a summary of the 308 companies from Aug 2017 Reporting Season and how they did 4 mths later:

Overall 124 companies were down on the day they reported, fell -4.4% on the day, but in the 4 mths since have recovered +7% to be now up +2.40%.

The Top 20 Best performing Stocks on Day 1

These stocks were up +10.7% on Day 1 (Vs all 151 up stocks that were up on average at +4.3%). Then after Day 1, they have rallied another +18% to be up +29% 4 mths later.

What is interesting here is that the short interest in the 20 best movers on Day 1 was high at 3% Vs the average of all the other ‘up’s at 2.2% and even higher than the ‘falls’ on day 1 that had a short interest of 2.4%… Why ?? Well it seems that if there is a “big short’ & the stock has good news – we’ll see an exceptionally big move on day 1 as shorts are forced to cover & instos weigh in as well.

The top 20 worst performing stocks on Day 1

15 of the 20 stocks “missed”, also the short interest in them was high at 3.5% vs the other day 1 falls at 2.4%. So the shorts were very good at picking these losers. But these stocks were hit so hard on day 1 –falling -11.6% that their move since has been to bounce back +5.1%, to now be down -6.6% overall since they reported. But the ASX 200 has rallied +6.1% in the 4 mths after - so looks like mkt rising has helped them.

Of the 8 are now higher than where they were before they reported. So the market may have seen value in these stocks, and possibly as the time to buy them..?

This article is based on excerpts from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more by clicking here.