What Happened?! Earnings Fade in GOOG and MCD

How is it that a company reports higher profits, yet its stock price declines intraday?

This phenomenon is quite common, where what a new investor expects (or even common sense expects) to happen does not materialize, and in fact, the opposite occurs.

Consider two examples from Friday, April 20th, where the Dow set new highs and rallied over 100 points (a clear up-trend day).

McDonalds posted Quarter 1 earnings that were 22% higher than last quarter. With such a surge in profits, wouldn’t you expect to buy the market (go long) at the open and ride your way to profits?

This was not the case, and in fact, had you bought the open, you would have grossly overpaid for your shares (open at $49.60 and close at $48.35, a loss of $1.25).

Here is McDonald’s (MCD) impressive daily chart:

This is a classic case of “buy the rumor (of good earnings) and sell the fact (of reported earnings).” The professionals who took part in this “trade” bought in anticipation of the earnings release and “took profits” and sold to those who bought after earnings were released. And note I’m not saying price won’t go higher – I’m saying that if you bought the open, you’re likely confused and disappointed because your expectations were not filled.

The same event occurred in Google (GOOG) yet with 10x the potential loss.

Google’s daily chart:

The same logic can apply to Google with the “buy the rumor” logic. New investors got temporarily burned by buying Google’s soaring profits. How’s this for unbridled bullishness: Google’s first quarter profits soared 70%, handily beating analysts’ estimates. Why not buy the open and ride your way to financial freedom? Because you would have lost $10.00.

After releasing earnings, Google’s price behavior opened at the high of the day and closed at the low. Not surprising behavior for the professionals, but befuddling and confusing (and fear inspiring) in beginners and those who lost money Friday.

Do not believe everything you read and be very cautious when all signs point in one direction (up or down). Chances are, you can make more money by fading news and earnings reports than by trying to profit when they are released.

(Disclosure:  I have no positions in, nor did I trade these stocks on Friday.)