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"Bad News" is Good News for these 3 Stocks

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Market Reality & Psychology Matters

If Wall Street were obvious, far more investors would be consistently profitable. However, only a small portion of investors understand how equity markets work in the real world. Unfortunately, many of the most important lessons an amateur investor can learn cannot be found in a textbook. Those savvy investors who study market history understand that equity markets often fool the masses because they discount the future, fade the crowd, and switch direction at the least expected moment. In other words, stock prices do not trade off the present but instead reflect investor expectations about a company’s future.

Misconception: An earnings miss is bad for a stock’s price.

Reality: An earnings miss is not necessarily bad for a stock price. If poor earnings are already “baked in” into a stock’s price and future expectations are rosy, earnings misses often acts as a potential bottom for a stock.

Lesson: It’s not the news that’s important. Instead, it’s the reaction to the news that matters. A rally on “bad news” is one of the most bullish indicators in the market.

Below are 3 stocks rallying on poor news:

Enphase Energy ((ENPH - Free Report) )

Enphase Energy is a solar company specializing in microinverters. Simply put, a microinverter takes the unusable electricity that solar panels generate (direct current or DC) and converts it into usable alternating energy (AC). ENPH’s products help clients to achieve more robust energy harvest, reliability, and efficiency.

ENPH Misses EPS Estimates, but Rallies

Last night, ENPH released EPS of $0.35 per share, missing the Zacks Consensus Estimate of $0.42 by 5.97%.

Bullish Catalyst

Whether the Fed cuts interest rates in 2024 or not, rates are unlikely to go higher in the intermediate term. That’s good news for ENPH and other solar-related companies. High interest rates are a negative for the solar industry because they hike the cost of financing for solar projects. In other words, the worst may be over for ENPH.

Zacks Investment Research
Image Source: Zacks Investment Research

Tesla ((TSLA - Free Report) )

Embattled EV maker Tesla reported earnings last night that missed (already low) expectations on the top and bottom lines. Nonetheless shares spiked more than 10%.

Earnings Likely Hit a Trough During Transitional Period

Tesla is in a transitional period. However, several announcements by CEO Elon Musk helped to quell concerns. The most significant announcement on the TSLA earnings call was that the company will accelerate the launch of cheaper cars.

Potential GARP Opportunity

If Tesla’s earnings can reaccelerate in the coming quarters, it will set the stage for a classic growth-at-a reasonable-price (GARP) play as the company’s price-to-book ratio hovers near all-time lows.

Zacks Investment Research
Image Source: Zacks Investment Research

Boeing ((BA - Free Report) )

Boeing, the defense contractor and aircraft manufacturer, is among the worst performing stocks year-to-date, losing more than 30%. BA shares have struggled due to ongoing safety concerns and reputational damage. However, despite the poor news and stock performance, BA topped analyst expectations for a second straight quarter.

Zacks Investment Research
Image Source: Zacks Investment Research

If BA can clean up its production concerns, the stock may rise as analyst expectations remain low.

Bottom Line

Stocks often bottom on poor news. Investors should focus on the reaction to the news instead of the news itself.

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

The Boeing Company (BA) - free report >>

Tesla, Inc. (TSLA) - free report >>

Enphase Energy, Inc. (ENPH) - free report >>

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