Why does a company’s stock price generally go up on a good announcement, then retreats days after?
December 15, 2009 by
Filed under company retreat
I understand that many institutional investors buy lots of shares the day a company announces good news. Usually, the next day, the stock price retreats a little, only to eventually go back up. Why does this happen?
As you would appreciate, the current market price of a stock reflects its earning capacity on a per share basis; commonly called the EPS or earning per share and the price to earnings multiplier the investors are willing to pay for the said stock.
When there is good news with regard to the stock; which is not as yet reflected in its increased earnings per share (EPS) it is discounted for through an appropriate increase in the price to earnings multiplier (commonly called the P/E ratio or multiplier). Subsequently, when the results are declared; there may be an increase in the EPS and the P/E multiplier for a period of time would remain at the same level as earlier; thereby causing the stock price to show an increase.
The price fall with regard to the stock under study experienced thereafter most likely would be the result of selling caused by investors booking out their profits at these higher price levels of the stock in question. However, after that period of selling the stock price stabilizes and moves up to reflect the new EPS and P/E multiplier the investors are willing to give it.
Sincerely,
Akash
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