Once again...it's expectations! - Views on News from Equitymaster

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Once again...it's expectations!

Apr 13, 2004

'Alcoa declares March quarter results, PAT up 74% YoY, stock loses more than 5%!" "Hero Honda declares 4QFY04 results, PAT up 42% YoY, stock down 3%!' Whether it is the US markets or the Indian bourses, once again, it is expectations (or estimates to give it the research touch) that have managed to rule investor sentiments. International aluminium major, Alcoa's results have been splendid wherein it achieved a bottomline growth of about 74% during the March 2004 quarter, thanks to strong aluminium prices. Similarly, the Indian motorcycle leader, Hero Honda, declared its 1QFY05 results yesterday wherein it registered a bottomline growth of 42%. However, both these stocks received a drubbing on the day of their results and prima facie the reason was that these companies failed to meet 'market expectations/estimates'.

This has now become a common phenomenon every quarter for markets across the world. Investors build up huge expectations, often irrational, and then expect the company to live up to the same. Anything short of expectations, the sentiments turn sour and the stock price takes a hit. It is primarily the small investors that have to bear the brunt of this phenomenon. Retail investors need to be cautious in this, as they are the worst affected in such volatile movements. They should refrain from playing the results and rather take a longer-term view on a particular stock.

While this (recent) tradition of declaring quarterly results continues to be a debatable issue with regards to its advantages and disadvantages, we feel investors should look at the quarterly results from a different perspective. We feel that the trend emerging from quarterly results should be taken as a reference for longer-term investment decisions and one or two quarters of below than average performance should not make a difference to long-term investors.

Investors need to understand that in the long term, fundamentals and not expectations guide stock prices. This fact has been proved time and again. At this juncture, investors must recall the Infosys results same time last year, wherein a below than expected guidance by the company had created havoc on the bourses, with the stock tanking by about 40% in just two trading sessions! However, it soon managed to recover ground, as its long-term prospects came into play. So, wait for the results to be declared and then take an investment decision. Though there may be short-term volatility, as traders get in and out of stocks, hold on to fundamentally sound companies. They are surely to come out of the trough, sooner or later.

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