When you are in a trade, it is crucial to understand both sides of the trade. Both the Long/Bull thesis, and the Short/Bear thesis.
Every stock trades on supply and demand, and every new data point will drive both bulls & bears to – in aggregate – either buy more & cover or sell & short more.
When a company comes out with an 8-K disclosing a new contract which would double the company’s revenues, it’s obviously bullish & there isn’t much to think about. But when a company releases quarterly earnings, which is hardly ever unanimously positive or negative, there is almost always a certain margin number, a specific segment revenue trend, a CAPEX forecast etc. that some people are looking for. The key is to understand both the bull & bear theses and have the ability to dissect the PR, and find those key data points, as this will give you the ability to predict whether existing bulls will buy more, hold, or sell, and if existing bears will cover, stay short or short more.
A few recent examples.
$ZNGA
I shared my $ZNGA Long Thesis several months ago (at ~$2.30). If you read the post or know the thesis, it has nothing to do with revenue growth. It’s all about their cash (and real estate) balance – limiting their downside – and huge (via online gambling) upside optionality.
The biggest concern to the thesis of course is cash burn. From my perspective (as a $ZNGA long), I’d rather have lower revenues, as long as costs and cash burn come down faster, – it’s all about cash flow from operations, free cash flow, and building relationships for the future.
So when $ZNGA came out with earnings, I was thrilled. Yes, revenues beat expectations, but that wasn’t the point. It was all about the company being able to contain and lower their cost structure. (I was upset about the lack of real buybacks, because if their cash isn’t returned to shareholders – as huge as it is – it will get discounted by investors).
I did however see some tweets like these…
$ZNGA yoy sales growth over last six Q’s: 80%, 59%, 32%, 19%, 3%, 0%
— Cory Johnson (@CoryTV) February 5, 2013
Commented on StockTwits: Or it could just be that the $ZNGA numbers stink? Nah? That couldn’t be. stks.co/t1qo
— Cory Johnson (@CoryTV) February 6, 2013
… and while i do understand that slowing revenues is the backbone of the bear thesis – so i guess it’s fine for bears to bring it up – it was definitely outweighed by the company’s cost reduction and hence the nice move on/after earnings.
$YHOO
I shared my $YHOO long thesis a couple of times (YHOO isn’t really Yahoo! & YHOO to $60.41?)… and anybody that follows me knows, this is all about SOTP (Sum Of The Parts). Yes, Marissa Mayer is boosting moral and gaining the faith of some to turn around the core US business, but even most bulls would agree that it is still going to be a hard & long road. Bears on the other hand, mainly focus on the long-tern struggles of the US core business, and speculate that the international assets are too illiquid and won’t be returned to shareholders even if monetized.
So when $YHOO came out with earnings that showed real advances in the US core business and the stock popped ~6% on the news, I was focusing on the lack of real updates/advances in the SOTP story, I tweeted that it was probably an easy fade, and followed up with this the next day…
I think $YHOO‘s spike last night was an easy fade (said so at the time). wouldn’t be surprised to see it down lower by EOD.
— MicroFundy (@MicroFundy) January 29, 2013
Lesson from $YHOO… KNOW what bull (& short) thesis is. Yesterday’s Release did NOT help that the Bull story one bit. Easy fade.
— MicroFundy (@MicroFundy) January 29, 2013
… The stock closed down the following day, and over the next week drifted even lower before stabilizing on Y! Japan’s impressive earnings results. (SOTP FTW!)
By knowing what the bulls & bears were looking for, you would have known that the US core improvement wouldn’t help the stock much. On the flip side, an announcement of some type of monetizing of Y! Japan, or an Alibaba Group IPO – that would be something that would take the stock to the next level. (This is also one of the reasons – I believe – the $YHOO/$GOOG deal announced last night was mostly faded today.)
$GMCR
Last night’s release seemed (at first blush) to be very bullish – you had EPS & revenues beat, even guidance seemed fine, and the stock initially spike over $53. But if you followed #FF list‘s @firstadopter he right away tweeted the relevant data points – data that theses were built on…
NOT good report $GMCR KCups big miss, guide down next qter, & brewer beat less important due to promos. Bears going to love capex lower too
— firstadopter (@firstadopter) February 6, 2013
… Within 10 minutes the stock fell >10 points (although recovered a bit today).
Bottom Line
Know what you’re invested in, why you’re invested in it, and what data point are important to that thesis.
- MicroFundy
