Why some stocks dip despite reporting strong quarterly results. Top 5 reasons
3 min read 20 Aug 2022, 07:23 AM ISTPositive quarterly results are not enough, it needs to meet or even beat market expectations to drive the stock, say experts
PremiumAs result season is almost over, market has more or less done with its reaction to the quarterly numbers reported by various listed companies. However, in the results season gone by, it was found that some stocks remained under pressure, though its Q1 results were highly positive. IRCTC shares are glaring example of it. IRCTC shares were trading lower a day after the state-owned PSU company reported 196 per cent jump in net profit in Q1FY23 (recent rise in IRCTC shares is due to the data monetization buzz).
Speaking on the reasons for stock not surging despite reporting strong quarterly results, Umesh Kumar Mehta, CEO at Samco Asset Management said, "Reporting strong quarterly results is not enough to drive the stock. It has to meet the market expectations and beat its peers as well. Apart from this, there are various other factors like base price (which is low due to Covid impact last year), outlook for next few quarters, etc. Some times, stocks fell due to triggers, which is beyond any companies control. for example, we recently witnessed FIIs fishing out money from the Indian stocks due to dollar index rising to record 20-year high of 109.30 levels. In such a scenario, a better quarterly results was not enough to keep the stock in uptrend."
Here we list out top 5 reasons that lead to pull down a stock despite strong quarterly results:
1] Market expectations: "Generally markets tries to expect companies to report results with certain expectations based on industry data, competitor performance and overall industry performances. So, for any company if the expectations are largely met than in short term profit booking is seen which leads to fall. So, even if the results are good but was in line with expectations than that alpha disappears and gets priced in the stock," said Narendra Solanki, Head- Equity Research at Anand Rathi.
2] Cash flow position: "Apart from earnings the market also values the balance sheet and cash flow position of the company and if there are any negatives on that aspects like low or negative cash flows, high receivables and inventory position etc. may also dampen the valuation," said Narendra Solanki of Anand Rathi.
3] Profit-booking: Some times, market make an assessment aboput the kind of quarterly numbers a company would be reporting. In that case, bulls starts buying ahead of the results announcement and book profit once the result is announced. It also leads to dip in shares despite positive quarterly numbers.
"When a significant number of investors use the good result momentum to book profits, it may cause a fall," said Ram Kalyan Medury, Founder & CEO at Jama Wealth.
4] Business outlook: "Sometimes a company manages to give positive numbers but its business outlook comes in the management guidance that very people looks at. For example an Indian IT company may be able to give better numbers but if the company has lost one or two big clients in the last quarter, its impact would appear in the next quarters. So, business outlook of the company is also important," said Umesh Kumar Mehta of Samco Asset Management.
5] Market sentiment: "Sometimes a company continue to feel the heat of market sentiments. Recently, in 2022, we saw heavy sell-off due to the outbreak of Covid. That time market sentiments were so low that even quality stocks had to receive heavy beating. In such scenario, strong quarterly numbers were not even looked at as equity investors were shifting their money to safer haven," said Umesh Mehta.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
