October 28, 2008
US Steel (X) announced its 3rd quarter profits tripled from last year. The stock fell to 28 dollars a share, 3 times earnings. It is exhibit A in the case for the total zaniness of the stock market.
October 28, 2008 | Permalink
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I agree with you the markets today are zani in many respects, but that being said, the stock price of a company is a reflection of the estimated present value of its future cash flows, and is impacted much less by past and current performance and events. Furthermore, because of the time value of money, the near term expectations of future profits will have more of an influence on share price than will a later boon. Thus, despite US Steel's profits being the highest in history, the simple statement by the CEO that fourth quarter earnings (and likely other near term future earnings) will be down becuase of softening demand for thier products is enough to warrant such decrease in stock price (well maybe not to 3x earnings).
A better example of market zaniness can be found with National Oilwell Varco (NOV)(see also RIG), an oil services provider. They also had strong earnings just recently released, but more importantly there is evidence that they have a backlog of work that will keep them running at 100% capacity for the next two years at a minimum, even if they don't secure another single development order. Thus, they should be able to get through a good chunk of the hard economic times without suffering any decline in their revenue/profit growth. When earnings were released, the stock price jumped 11%, but subsequent general market selloffs (see hedgefund deleveraging) have driven the price back to a 52 week low, and below what it was trading at before the new earnings report. At $40, this stock is undervalued; at today's price of $23, this stock is a huge deal and opportunity for a 300% gain when energy and commodities prices recover.
Posted by: Mike Rosemeyer | Oct 28, 2008 10:51:28 AM