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15 Feb 2012 – Pick winners in drift rallies

[COMMENT: Very interesting observations about share price movement after an earnings announcement.]

(15 Feb 2012, AFR, p17, Bianca Hartge-Hazelman)

‘As a general rule of thumb, missing expectations during reporting season can cause a company’s share price to underperform the market for many months, while beating expectations can have the opposite effect. But not everyone agrees this approach is a winning formula for investing.’

‘A study of the past five February reporting seasons by Commonwealth Bank of Australia found that short-term investors who buy shares after a company reports a positive earnings result are likely to experience five months of gains before it comes time to sell out of the stock.’

‘Macquarie Private Wealth division director Martin Lakos believes that gains can last for up to six months, while falls can extend out to the same period depending on the direction of a company’s performance in reporting season.’

‘The seemingly obvious phenomenon of stock prices moving in the same direction as earnings changes after the earnings are announced has come to be known as post-earnings announcement drift. But experts say investors should think twice before relying too heavily on it.’

‘ “It might happen in 60 per cent or 70 per cent of cases, but it might not work all the time,” said Wilson HTM strategist Damien Klassen.’

‘CBA’s head of quantitative research, Nizar Torlakovic, said investors should hold off buying or selling stock during reporting season until it becomes clear what the market sentiment is to the result.’



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