Surprise! Surprise!

Nearly every trading day, some company announces operating results or other news that seem to differ markedly from consensus estimates or market expectations. This generally results in a sharp, virtually instantaneous swing in share prices. If the news is disappointing, there is often an immediate 5-10% drop in prices and if the news is good, a sudden jump appears to be the new norm. Are markets overreacting and wouldn’t you have liked to have participated?

Yes, markets are probably overreacting in the near-term and no, the moves are far too fast to allow participation unless you already have a position.

What to do? Any time there is a new development, better or worse than expected earnings or some other unanticipated news; investors should undertake a careful review of the assumptions behind the original investment decision and then factor the new information into a revised investment thesis.

If you already own the stock, a careful reassessment of the outlook, versus your previous assumptions, should help you to decide whether to sell, add, or stay the course. If you don’t already own shares in the company, but have considered an investment, the new information represents an opportunity to reassess your expectations and valuation analysis.

This, in essence, is what we do here at Sigma, both for portfolio investments and prospective new commitments.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA