For at least the past few months I have been harping on a singular theme here at Avoid The Bag. That theme is that stocks trade on sentiment and not on fundamentals. Many will argue the value of a company's shares depend on revenues, profits, net asset value and a host of other definable metrics as well as guidance about what those numbers are expected to be in the coming months and years.
Even with a speculative stock that is losing money in the here and now, those who reside in the fundamentalist camp will claim its about projections based on expectations of fundamental performance. I will channel the late great actor Carroll O'Connor and his Archie Bunker character for my response.
I realize that's not exactly a high brow way to make a point, so I will expand on my reason for giving fundamentals the proverbial raspberry. I won't have to try too hard though, because all the proof you need is provided by the newly installed President of the United States, Donald J. Trump.
What do Boeing, Lockheed Martin, Toyota, GM and Ford all have in common? Aside from all being involved in the manufacture of either cars or airplanes, they have all drawn fire from the Twitter account of "The Donald". And almost immediately all of them saw their stock prices slammed. If you've been following media reports on the markets you've likely heard something like:
"Shares of (Insert Stock) are trading sharply lower in the wake of President Trump's tweet about the company".
But why would something as innocuous as a simple tweet send the stocks of some highly profitable and fundamentally sound companies markedly lower? A tweet cannot undermine or alter the fundamental pillars upon which a company is built. Can it? Of course it can't, but it can affect investor sentiment.
And then of course there's manipulation.
Rather than going into great detail I will link up a Washington Post article that explains how some traders have operated in order to profit from the Presidents social media posting.
Quite simply there are programs and algorithms that have been set up to monitor +RealDonaldTrump and when there's a post about a public company it determines whether the sentiment is bullish or bearish. If its bearish as with Boeing, Lockheed and the other aforementioned companies, then within seconds short positions are opened.....shares are borrowed from shareholders and dumped back into the market, sending share prices lower.
Here's the Washington Post article:
So what happens? Some retail schmo has some of his retirement money invested in a stock like Lockheed Martin that he bought for $265 at the start of December. All of a sudden he checks in on his investment and sees its fallen to $250 and reading about the President's comments he gets scared and sells for a loss. Those who went short at $265 buy back the shares they borrowed at the lower price and pocket the difference in profits.
The biggest driver of sentiment is of course price, the second biggest driver is price, and the third is also price. In real estate they say its location location location, with stocks its location too, but also direction. The location of the PPS and the direction in which its moving.
And that was with Lockheed Martin, an enormously profitable defense contractor with a lot of seasoned investors and market professionals as stockholders. Imagine how easy it is to push around the stock of a speculative company without profits and maybe not much in the way of revenue either, like a development stage biotech for example.
I write this blog for retail investors, to hopefully give them some insight into the workings of the markets so that they can hopefully make better decisions. However it doesn't matter how good you are, how diligent your research is, how flawless your analytical skills. You will still make bad calls on occasion. The reason is simple, there are always bigger fish out there.
Now to end this posting off, and to toss a bone to those who rely heavily on the fundamentals I will attempt to make peace. Ultimately fundamental performance should affect investor sentiment and solid performance will most often be rewarded and reflected in a company's PPS. Lockheed Martin still hasn't gotten back to the $265 area it was at before the President's tweet but if they deliver solid financial results in the weeks and months to come I have no doubt they will get back there and beyond.
As always good luck to all retail players swimming in this shark tank, comments are always welcomed but as I always request, no profanity please. Actually it doesn't matter ultimately, swear all you want...I moderate the comments and just delete those which tell me to do something that is physically impossible.
