Listen to Your Stocks
By
Michael Cintolo, Vice President of Investments and Editor of
Cabot Market Letter and
Cabot Top Ten ReportFrom Cabot Market Letter 4/23/08
Last Thursday evening,
Intuitive Surgical (ISRG) reported a solid quarter-revenues were up 65%, and earnings of $1.12 per share were up 81% and beat estimates by 14%. But then the stock collapsed on Friday, plunging into the 280s on huge trade, and has faded further since.
The common questions whenever a great growth company collapses on earnings are, "Was the report that bad? Isn't it still a good company?" And the answers are, no, the report wasn't that bad, and yes, it's still a good company. But you should still sell the stock!
We base our decisions on how the market actually works, and we know that a big earnings gap lower, especially after a stock has enjoyed a huge advance, often spells the end for a stock's up cycle…at least in the intermediate-term. That's especially true now, as ISRG has been repeatedly repulsed from the 360 level in recent months, resulting in a toppy-looking pattern.
Could ISRG find support right here and begin to trend higher again? Of course-anything is possible in the stock market. But history tells us that the odds are against this stock taking a leadership role in the weeks and months to come. Hence our decision to sell.
While the downs of earnings season are painful (and, unfortunately, inevitable), the good news is on the flip side of the coin. Stocks that gap up on earnings, especially early on in a new market advance, often instantly join the ranks of market leaders. Best of all, they're great candidates for purchase, as strong gaps higher usually lead to a continued upmove in the weeks and months to come.
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