Ask a Fool: Why Don't Strong Earnings Always Boost Stock Prices?

Q: One of my companies just reported earnings that significantly beat expectations, but then the stock went down. How can this be?

The second-quarter "earnings season" just got underway, and it's important for investors to remember to look past the headline numbers.

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Specifically, the headlines tend to focus on two main metrics: earnings per share (EPS) and revenue. And they generally compare these metrics to what analysts had been expecting.

However, it's important to realize that the main catalyst that determines what a stock's price will do is the future. Therefore, it's a smart idea to pay attention to any metrics that tell you what the company could do in the coming quarter, year, or even further out, as this is what can really move a stock after a company reports earnings.

For example, if a company beats expectations on both revenue and earnings for the second quarter but warns investors that sales could be weak during the second half of the year, shares could easily drop despite the strong results.

Conversely, if a company misses earnings estimates but says that its sales volume is great and that it expects an excellent holiday shopping season this year, the stock could rise despite the miss. High-growth tech stocks do this all the time.

The bottom line is that there's a lot more to earnings reports than earnings. Be sure to consider the entire report when deciding how to invest. After all, the market certainly does.


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Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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