Jayant Pai | firstname.lastname@example.org
A friend of mine who is a newly converted equity investor was rather perplexed with regard to two developments recently. The Infosys stock fell 5% on the day despite announcing a Year-On-Year (Y-o-Y) net profit growth of 14% (a very decent number, considering its huge size) while the Nifty rose by nearly 2% on a day when the Index of Industrial Production (IIP) data for November 2010 showed a Y-o-Y growth of merely 2.7%. According to him, the opposite should have happened in both the cases. Although short term market moves may happen for apparently no particular reason, one explanation for this may be that it things were already “priced in”. This is jargon for saying that the stock/index had already moved in a particular manner PRIOR to the news.
The Infosys stock has had a stellar run for the past eighteen months or so. Today, the optimists outnumber the pessimists. It trades at a value of over around 22 times one year forward earnings. Hence on the day of the result there was nothing much to look forward to. The absence of fresh buying pursuant to the results may have led to the fall. Markets always display a “look-ahead” bias. Like Oliver Twist, they too always want “some more”. Merely meeting expectations does not excite the market, especially if the valuations are already at the top end of the historical band and at a steep premium to the broad market. The Infosys stock may now meander for a quarter or two, biding time and shaking out the “weak longs”. Whenever markets price anything for perfection, those who purchase at the margin take on a lot more risk as compared to those who get in early.
The reverse may have been true for the IIP data. The index had already corrected around 8% from its recent high. A lot of bad news was already out in the open (viz. Inflation, scams, fear of rising interest rates etc.). Also the market was expecting a poor number. Hence there was a relief rally of sorts, when the news was out of the way.
The problem with markets is that prices will usually not react the way we want them to. Different situations may lead to different price actions even though the event/news may be similar. For instance if Infosys had shown a 14% growth in profit in early 2009 the price may have moved up 5% merely because it was all doom and gloom in those days and any company showing a semblance of growth would be enthusiastically embraced.
Besides, it may so happen that these short term movements may not really change the longer term trend. That will depend on the market’s perception of a company or country’s long term performance prospects. Infosys has seen various ups and downs since it was listed around 17 years ago. But the long term trajectory has been upward because of its consistent performance.
The key lies in identifying the long-term winners. Easier said than done of course….