Why did Tyco Food (TXN) go up in price when earnings were bad?

Question

TYCO Food (TXN) went about 10% or so right after announcing terrible earnings in mid-November. And many analysts have been downgrading the stock since the fall. Can anyone tell me what is going on? I cannot find any reason why it would go down unless there is takeover speculation.

Answer 1

There's a saying, "buy on rumor, sell on news"

Typically, stocks future news is priced into the stock price. Thus, if everyone was already expecting bad news, the stock will generally take a beating before the earnings announcement. Then, at the announcement, if the news is worse than expected the stock generally falls further. If the news is not as bad as people were expecting, then it'll generally go up.

This does not work in all cases, but is generally true. Why? Well, some companies will factor that "surprise" effect into their news, so they come in "better" than they lead the market to anticipate. After a while, the market also factors in the "surprise" so now the company would need to beat the estimate AND the surprise.

Anyways, this should give you a general reason why it happened.

Cheers!

Answer 2

I couldn't find financial information on Tyco Food, so I am not sure what happened in this case. The ticker, TXN, is Texas Utilities.

What the previous post says is called the "Efficient Market Hypothesis," which claims that all available information, both public and nonpublic, is incorporated in the stock price. This is not correct (but the post is correct to mention it as a theory).

The price of a stock can be considered the present value of future earnings (or cash flow or revenues depending on the analytical method use). If earnings were terrible, but not as bad as expected, that means the stock was undervalued (analysts thought it was worse than it actually was), so the when investors incorporated the new earnings information, they saw the stock was underpriced. You see this in the airline industry. Even though an airline stock may lose a lot of money in a quarter, the amount loss may be less than expected, thus leading to a stock price increase.

Answer 3

All capital markets are discounting mechanisms that discount ALL the available information at all times. Which is not to say that inefficiencies doesn't exist.