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Ready, Fire, Aim!
Dear American Capitalist Readers,
Wall Street is famous for its steely-eyed, just-the-numbers analysts and their mathematical models. And there is tremendous emphasis placed on removing emotions from investing, since they cloud judgement and make us trade in a reactive, instead of proactive, manner. But in reality, Wall Street is a pretty emotional place. The never-ending battle between collective greed and mass fear rages constantly, with emotions driving trading action far more often than you think.
These emotional swings are often good opportunities for alert traders. They can go both ways, i.e. a company can skyrocket on good-not-great results or on the mere promise of strong growth, setting up a good short trade when the buzz abates. Conversely, a stock can get crushed for missing overly optimistic earnings expectations, creating a "baby and the bathwater" type of situation in which a good company gets tossed over gunwales because of a penny miss in EPS. In my career, the latter situation is far more common, especially during bull markets.
Last week shares of GLOBAL PAYMENTS (GPN) plunged 18% on news that it merely MET earnings expectations of $0.42 per share in the second quarter. Sales rose 18.7% while earnings grew 11.1%. A leader in the electronic-payment industry, GPN has grown both sales and earnings at a double-digit pace since it was incorporated in 2000, while its business throws off tremendous amounts of cash flow - nearly $100 million in the second quarter alone. The stock fell over seven points on Friday, ending at $41. Hmmm....
The problem, at least as Wall Street sees it, is that the company did not EXCEED expectations, something it has done consistently for the past four years. Whether this was because the estimates were more accurate (perish the thought!) or whether the company has managed expectations better is anyone's guess, but company guidance of $1.69-$1.75 for fiscal 2007 still implies 12%-15% annual growth in EPS this year. By fiscal 2008, Wall Street expects the firm to book at least $2 per share in earnings. The balance sheet is pristine, with virtually no long-term debt, while return on equity is nearly 20% and return on assets 15%.
Having doubled sales since 2003, the company has grown fast and attracted a premium valuation as a result. Once in a while, companies disappoint Wall Street for whatever reason, and get a quick haircut. However, in my experience these stocks often rebound relatively quickly, especially when the reason for the drop was merely matching expectations instead of exceeding them (which implies overzealous analysts, not any significant change in the company's business). GPN's seven-point hit last week is most likely an emotional over-reaction in the finest tradition of ready-fire-aim Wall Street traders. It may be worth your while to consider taking advantage of it.
Sincerely,
Steven Lord, Editor, GRESSOR
