At the beginning of the month, Intel (INTC) shares dropped drastically upon news that Apple (AAPL) would drop the world class chip maker to make its own. My first thought was “God why two companies I like have to beat-up on each other like this?”. And my second thought “this is a good opportunity to buy INTC shares). This is exactly what I published on Twitter:
You are going to tell me “yeah, Mike, that’s easy! When the stock drop on bad news, it’s good news for investors!”. Not too fast fella. How do you welcome dividend cut news? That’s what I was thinking.
Here’s something very confusing about the stock market; sometimes good news means bad news and vice versa. After my tweet about INTC, my best friend asked me how do I make the difference between good news and bad news when it comes down to trade. I wanted to share my thoughts about how to analyze news that has a serious impact on a stock. Here are a few of my tricks to trade on news.
01 Don’t get overexcited/over panicked
I’m always fascinated to see how the stocks is filled with market professionals who should know what they are doing, but trade with the rationale of a teenager in love. The chart above shows how Walmart (WMT) traded over the past 7 months or so. I’ve picked those dates since I remember how I was surprised to see WMT going up by more than 20% over the same news: digital sales growing.
I agree it was good news for both the company and shareholders, but does it worth 2 jumps of 10% each within the same month? The answer was obviously “no”. For that reason, the stock dropped like a rock in the following quarter. The point is that WMT didn’t have a catastrophic quarter in February, it’s just that the market was overhyped and realized it expected too much.
Whenever there is news affecting a stock by 5-10% in a single day, it should catch your attention, but leave your emotions asides.
02 Before you read more about the news, go back to your investment thesis
I think the worst thing you could do as an investor is probably to trade on a stock you know nothing about. A 10% movement (up or down) should not be a trade trigger if you don’t already know where the company is coming from. For example, I couldn’t care less when Facebook (FB) dropped like a rock recently as I never followed the company. Now that the market is very polarized around its failure, there is no point for me to analyze the company. I’ll get more noise than anything throughout my research. As I explained how to catch a falling knife, the whole idea is to have your buy list ready and pull the trigger when there is a big movement. If your investment thesis isn’t ready, your brain will just play with you and you might end-up making a bad decision.
03 Read the news, assess its long-term impact and decide if you should buy, sell, or simply do nothing!
In most cases, the latter option is probably the best. I’m all for building a triple digit club instead of getting 10-30% quickies here and there. The problem when there is a big movement on the market is that emotions get involved.
You will either become too nervous to think straight or to excited to see the bad side of the news. I think it’s even better if you wait a few days before making any moves. The major swing happens a few hours after the announcement is released anyway. After that, everything calms down and you deal with a new “normal price”.
When rumors around Apple making its own chip and dropping Intel appeared I didn’t flinch. Sure Apple is a big client for INTC, but the chip maker is a lot more than “Apple’s supplier”. Over the past couple of years, INTC has developed a completely different business model around the cloud with its data-centric services (which is about 50% of its business now). It will also be involved in artificial intelligence (AI), and nanotechnology. Does the fact that Apple will make its own chips for its Macs change anything to data centric services, AI and nanotechnology? This news change nothing in the investment thesis. Therefore, if INTC was on my buy list (instead of being part of my DSR portfolios already), I would definitely benefit from this drop to buy some shares.
There was a time where I used to trade a lot on news, I was 23. I don’t do it too much these days. I prefer sticking with companies for a longer span of time and cash more dividend along the way. I think that a dividend growth investing approach is a lot less stressful and definitely more profitable than trading news like they were hot cakes, don’t you think?
Disclaimer: I hold INTC & AAPL shares in my Dividend Growth PortfoliosGoogle+