During the latest earnings season we saw some strong beats from the likes of Netflix and Facebook. According to the DCF Hub methodology, these stocks were quite overvalued (valuation percentage in excess of 200%) leading into the report.
Of course, the gains from those beats are evaporating now, but this has me thinking. Are overvalued stocks actually more likely to beat on earnings than undervalued stocks?
Here's how I think about it: if a stock is overvalued then either the market is excessively optimistic or the analyst estimates on which I base my calculations are excessively pessimistic. If the former is the case, then this has no bearing on the earnings report. It is just another day for mr. market to remain silly. But if the latter is the case, then the day of the earnings report is the day of reckoning.
I'll need to pull together some data to test this theory. But in my anecdotal experience, earnings report days have been opposite days for value investors.
Has anyone else experienced this?
Of course, the gains from those beats are evaporating now, but this has me thinking. Are overvalued stocks actually more likely to beat on earnings than undervalued stocks?
Here's how I think about it: if a stock is overvalued then either the market is excessively optimistic or the analyst estimates on which I base my calculations are excessively pessimistic. If the former is the case, then this has no bearing on the earnings report. It is just another day for mr. market to remain silly. But if the latter is the case, then the day of the earnings report is the day of reckoning.
I'll need to pull together some data to test this theory. But in my anecdotal experience, earnings report days have been opposite days for value investors.
Has anyone else experienced this?
RSS Feed