How do you know for sure which way a stock is going to move post earnings? This is a secret that a lot of institutional investors know that a lot of retail traders haven’t yet figured out. And the secret is this: You don’t know. It’s a complete and total gamble. Nobody knows which way a stock is going to move post earnings. A lot of people think they know they can have really strong convictions, but at the end of the day, you just don’t know. It’s a gamble. Let me show you what I mean.
Let’s take C3.ai for example, that reported earnings after the close on Wednesday. C3.ai reported a loss of $0.09 per share, which was $0.08 per share better than expected. In other words, their earnings per share was twice as good as analysts were expecting. Revenue was also a beat. Revenue came in at $72.36 million, which was a 10.8% year over year increase, and it beat analyst expectations by $0.76 million. So based upon that huge earnings beat, how do you think C3.ai did after earnings? How much do you think the stock went up? Well, it didn’t. It actually fell 6.5% as of the recording of this video. Amazing, right? You just never know. Here’s a stock that beat analysts expectations by a ton, and yet the stock still fell after earnings. You just never know. Let’s do another example.
Chargepoint also reported earnings Wednesday after the close and they reported an earnings per share loss of $0.35 per share, which missed analysts expectations by $0.14. Revenue came in at $150 Million, which granted it was good. It was a 39% year over year increase. But it also missed analyst expectations by $2.34 million. Now what’s interesting about Chargepoint’s earnings is that the gross margin was 1%. 1% gross margin. This tells me that Chargepoint is 100% focused on increasing revenue and they do not care about making money right now. They’re not focused on profits at all. They are 100% focused on revenue growth. Now for a new company, a new startup like Chargepoint, focusing on revenue growth rather than earnings profit is actually the correct way to go. This is the right way to build a business, so long as you have enough cash on hand in order to survive your cash burn. Cash burn is the amount of cash you have to spend in order to grow your business for an unprofitable company. So as long as you can survive, you can grow.
And just look at Tesla as a great example. Years and years and years Tesla went by not making any money at all, completely unprofitable. They just focused on revenue growth. That was their one and only sole target. And then the stock traded flat and did nothing for years as Tesla was unprofitable. When they finally did start reporting a profit, the stock took off. Another example would be Palantir, which absolutely skyrocketed once they became profitable. Another stock doing real well right now that just turned profitable is DraftKings. All these stocks will go for years being unprofitable. The stock will do nothing. Then as soon as they start turning a profit, that stock will skyrocket.
So considering that Chargepoint is in the revenue growth stage; they’re not in the profit stage yet. And considering the fact that they had a horrible earnings; they missed earnings expectations by a ton. How much do you think the stock went down? Well, I should say… Do you think the stock went down? Did it go up? By how much? Well, this stock actually did fall after missing analysts expectations. It was down 7.6% as of the recording of this video. That was on top of the 2.75% decline earlier in the day. So grand total Chargepoint was down about 10% on the day. Okay. So far, we’ve looked at one company that beat analyst expectations and the stock went down. We looked at another company that missed analysts expectations and the stock also went down. Let’s go do one more just for fun.
GameStop also reported earnings Wednesday after the close and GameStop reported a three cent per share loss, which beat analyst expectations by $0.11. And revenue came in at $1.16 billion, which beat analysts expectations by $20 Million, but it was only a 1.8% year over year increase in revenue. So we have a company that is losing money. We have a company that only grew earnings by 1% year over year, but it was a big earnings beat based upon analyst expectations. So how do you think Gamestock performed post earnings? They beat analysts expectations, but like C3.ai also reported a loss. And unlike C3.ai, revenue only increased by 1%. So what do you think? Did the stock go up? Did the stock go down? How much did it go up or how much did it go down? You ready? GameStop rose 6.67% after earnings after falling 2.5% on the day for a net gain of 4% on the day. Wow. Crazy, right? We’ve got some stocks that beat analysts expectations that went down. We got other stocks that beat analysts expectations and went up. We got stocks that were losing money that went down, and stocks that were losing money that went up. It’s all over the place. You literally have no idea how a stock is going to perform post earnings. It’s a complete and total gamble.
Now, if you want to gamble, that’s fine. I gamble sometimes. Sometimes I’ll play earnings if the options are cheap enough. But you do have to understand that it is a gamble. Nobody knows for sure how a company is going to perform post earnings. Nobody knows for sure what a company is going to do. You just don’t know until after the earnings come out. Now, if you like to gamble, maybe you bought options. You thought you’d make money, you didn’t. Sometimes you do, sometimes you don’t. But overall, you’re just not making money with options and you’re not really sure what to do. You want to become a profitable trader but you’re just not sure how to get there. I recommend you go check out the course at https://weprofit.io/courses. That course, by the way, is designed to help new traders learn how to trade in the stock market and become consistently profitable. It covers options, investing, stock trading, everything. It is there to help you out. And by the way, that course has a 100% money back guarantee. If you take the course and you find you don’t get anything out of it, you can get a 100% refund within your first 30 days, no questions asked. That is my guarantee to you. That is how certain I am that you are going to get value out of the course. And don’t take my word for it. Go read the reviews at https://weprofit.io/courses. Now when you go to the checkout page, scroll down on that checkout page and you can read the reviews of people who have already taken the course.
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Now, when it comes to earnings, we already know that we don’t know which way stock is going to go. But there are other events that the companies can do that are a little bit more certain about how the stock is going to perform. And one of those is layoffs, which is a little bit counterproductive, but let’s talk about it. Roku’s stock jumped after the company said it would lay off 10% of their workforce. Now, layoffs are kind of a double edged sword. On one hand, a company wouldn’t be doing layoffs unless they were struggling economically, which you would think would make the stock go down. But on the other hand, doing layoffs increases profits. And what we’ve seen is that a lot of these companies over the last few quarters are showing a decline in revenue, but an increase in profits and the way they’re able to increase profits, despite the fact that revenue is going down is because they’ve been doing layoffs; they’ve been cutting their expenses. And if a company can lower expenses by more than the revenue goes down, their profits are going to go up. And this generally is good for investors. And that’s why we saw Roku stock rise 3% on the day.
But at the same time that layoffs are good for company earnings in the short term, it’s bad for the overall US economy and a lot of companies have been doing layoffs over the past few months, and this is starting to show up in the unemployment numbers. Last month, we saw the unemployment rate rise for the first time in four months and it rose to 3.8%, which is the highest unemployment rate we’ve had since February of 2022. The highest unemployment in a year and a half. Now, to be fair, the federal government, especially the Federal Reserve, told us that the unemployment rate would rise and specifically the Federal Reserve is fine with the unemployment rate getting up to 4.5%. Now, they don’t want the unemployment rate to go higher than 4.5%, but they’re fine if it gets up to 4.5%. What that means is more companies are probably going to do layoffs and the economy is probably going to get worse before it gets better. And all of this is because the Federal Reserve is raising interest rates in order to fight inflation.
But there’s a problem. Inflation is starting to go back up. Today, crude oil rose above $90 a gallon for the first time all year. And this is going to cause gas prices to go higher. This is going to cause inflation to go up. And what we’re dealing with right now is the worst case scenario for the US economy and the Federal Reserve, and that is why the stock market has tumbled for the third straight day in a row over fears that the Federal Reserve is going to have to raise rates even higher in order to fight inflation. But as the Federal Reserve continues to raise interest rates, this makes the economy worse. So what’s happening right now is we’ve got inflation rising at the same time the economy is getting worse and this is known as stagflation.
So what is stagflation? What causes it, and why is it so bad? Well, stagflation is an economic cycle characterized by slow economic growth or even an economic decline, as well as a high unemployment rate and inflation. So during stagflation, the economy is slowing down, the unemployment rate is rising, and inflation is rising all at the same time. And that is exactly what we have going on right now. We have inflation going up, especially with oil prices going up and even the core CPI and PCE increasing. We have the unemployment rate rising and we have the economy slowing down. We have the classic stagflation scenario and it is the worst case scenario for the US economy and for the Federal Reserve.
So what is the cure for stagflation? How do we get out of this? Well, unfortunately, there is no definitive cure for stagflation. You see, the problem is the Federal Reserve has a choice to make. They can either increase interest rates in order to fight the increasing inflation, but that is going to have the effect of making the economy even worse, which is going to put us into a deep recession. The other thing that the federal government can do is the Federal Reserve could lower interest rates, which will help stimulate the economy, but that’s going to have the effect of increasing inflation. So no matter what the Federal Reserve does, it’s bad for the US economy. They either increase interest rates to fight inflation, which makes the economy worse, or they lower interest rates to stimulate the economy, which makes inflation worse. Either way, the federal government is screwed, the Fed is screwed. There’s no good solution. There’s no cure for stagflation.
The only way to get out of stagflation, there’s only one way to do it, is to do what the Federal Reserve did in the late 70s, early 80s. You have to raise interest rates to insane levels to completely and totally knock out inflation. You have to cause a major recession in the economy. And that is literally the only way to kill stagflation. There is no other solution. There’s no other way out of it. Every single economy in history that has dealt with stagflation has gone through a major serious and deep recession in order to get out of it. Unfortunately, we are in stagflation now, and unfortunately, the only way to get out of it is for the Federal Reserve to cause a deep and major recession. There’s no other solution out there that economists have found in the hundreds of years that economists have been studying stagflation, Every single country that has gone through this has had to deal with a major and deep recession in order to get out of it. So that is where we’re at now.
When does this happen? Well, I don’t know. Sometime later this year, 2024, maybe 2025. Trying to time these things is nearly impossible. So don’t worry about timing because you can’t just know that it’s coming on the horizon. Be cautious with some of your more speculative investments. Maybe stick to some safer investments, maybe some dividend stocks, some value stocks. I would avoid growth stocks for right now on a long term investment horizon because this is going to come at some point down the line. Now, look, there’s plenty of trading opportunities every single day. Every day you’re going to have opportunities to trade the market, to buy stocks that are moving up despite the overall economy. I’m not trying to make any predictions here on how any individual one stock is going to do. I’m just giving you a long term outlook for long term investments to let you know how you might want to position your portfolio in the event of a downturn in the US economy, which it does look like we are going to get based upon how history has always played out with stagflation.