Company announces 2Q profit up 23%...

[tomh7 2]

Can anyone explain this to me?

[mrusse01 0]

Perhaps expectations were that the 2Q profits were supposed to go up say 50%...in that case the market would have built those expectations into the price of the stock to a certain degree, and the lower announcement would make the stock go down.

There are lots of possible reasons...stock price is a generally terrible indicator of how financially sound a company is.

[RadioGaGa 162]

The company I work for has seen stock price fall in the last year, but profits have increased, so yeah...one is not an indication of the other (necessarily).

[Jason Harris 31]

There was a time when I was day trading and a stock like the one you mentioned would be a prime candidate, because their financials would be good overall but below Wall Street's expectations, so the institutional investors would bail. However, there usually would be a slight bounce back to the overreaction, so the trick was to get in and out with a few percentage points gained.

Another thing to understand is Wall Street prizes growth over all else. Well, how can $50 billion companies grow at the same pace as a $2 billion company? They can't. Even if the first company grows sales by $2 billion, that's only 4% growth, whereas the second company can increase revenues by $250 million, which is 12.5% growth.

There's a high likelihood that the larger company is much more stable than the smaller one, but I guarantee you that the smaller company's stock will be trading higher because of the better growth. That's one reason companies will pay dividends to their investors, since they know the stock doesn't appreciate as much as the sales growth slows.

[chippa13 1844]

Along those lines, if a company has a strong balance sheet, most likely it is already heavily invested in by long term investors. If the company doesn't meet Wall Street expectations then you will see more of a quick change from the short-term bailouts, as mentioned above. Other long-termers will jump on those undervalued shares and soon the price will rebound.