Do stocks often take a dip right before earnings?

Question

If they do does it mean anything one way or the other? Do investers usually get nervous on the day before?

Answer 1

A lot of them do. It really depends on what news the earnings report contains. If a company had unexpectedly high revenues, it might shoot up a few points at earnings.

If you've done your homework and know that the company is solid, there is no need to be nervous about quarterly earnings reports.

Answer 2

Companies with earnings that come out below levels expected by analysts (a negative earnings surprise) tend to underperform the market. Most of the loss occurs within the first couple of trading days of the announcement, but the effect of the surprise can be seen as long as several months later. Many institutional investors have short-term investment horizons, which means that if a stock doesn't meet their earnings goals, they will sell the stock immediately. But the rest of the stock market will take some time to digest the information and act on an announcement.

Earnings surprises also rarely occur just once. Most negative earnings surprises tend to be followed by negative surprises the following quarter. Since most individual investors have longer-term horizons and goals, they are willing to sit by with one or two quarters of disappointing earnings. As long as the dissappointment can be explained adequately by short-term events rather than any fundamental long-term shift in the company, this holding strategy normally pays off with improved returns over the long term.

For example, take a look at SUNW today (7/30) who just announced their earnings after the market closed and blew away the analysts estimates of 5cents by 4 cents for a quarterly earnings of 9cents per share. SUNW initially closed at -.02 from the previous day and during after market hours were up 10%. This one is destined to go higher due to the efforts of the new CEO. Watch NBR tomorrow and catch the interview.
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Answer 3

The markets don't like uncertainty. Yes, investors get a little nervous before earnings reports.
Also, think in terms of buyers and sellers. Someone with intentions of selling a stock may not need to hear the earnings news. He or She has been following the stock closely since buying it. A new buyer may be more inclined to find out what is going on before jumping in.

Answer 4

Not necessarily.

It depends on many factors: investor expectations, if the stock has had a pre-earnings run, how leak-proof the company is, general market conditions, etc.