you recall what happens when a doctor strikes your knee with
a rubber reflex hammer? That type of reaction is what is happening
with the stock market when a company releases negative earnings
news. You don't have to use your brain to make your lower
leg kick up after your knee is struck, nor do you need to
will or plan the response. It just happens. Investors are
conditioned to quickly sell on negative earnings news. This
was a reliable reflex action earlier in the year but does
it make sense at this time? Stocks in many sectors have
been beaten down and a slower economy is common knowledge.
The slower economy is already factored into the stock market.
Is it any real surprise if a company adjusts slightly downward
its top line (revenue) and bottom line (earnings) forecasts
for the coming quarter? Is it a valid response to slam down
a stock on such news when it's already factored into the market?
We believe not. If you place a rubber band between your thumb
and first finger and then pull it towards you until it's taunt,
and then pull it further towards you, and then if you dare
to, pull it even further towards you, where do you think the
rubber band will find equilibrium? The markets aren't going
to climb to new all time highs in the next week, but it should
reach equilibrium at higher levels. If a company has strong
management, good products, and is in an industry expected
to have strong growth over coming years, then it most likely
is attractively priced at current levels. If stocks of this
description get slammed down by investors when they adjust
their earnings to more closely match the economy, there is
likely a buying opportunity for long-term investors. Accumulating
stocks in strong companies on any market pullback is prudent.