Thursday, January 30, 2014 5:56:27 PM
The market gives a company the benefit of the doubt ONE TIME. If a company says that it is going to create X amount of revenues or is going to earn Y amount of earnings, absent clear evidence to the contrary, the market assumes the veracity of that assertion. Consequently, the market is willing to take its chances based upon the assumption that the forward looking assertions are true. That creates hype and hype creates buying. Funny thing about the market, when the buyers are in a frenzy, the buying overdoes it and when the frenzy is over the price returns to a proper valuation. So when you have a combined buying frenzy caused by company projections, and those projections prove to be unreliable you have a grossly overpriced stock.
And the market remembers, it's that "fool me twice" deal. So a company gets one free bite at the forbidden fruit. Its stock price will get the benefit of the doubt and its price can run to ridiculous heights based upon the premise that its guidance is accurate. But after that one time, the market seems to intuitively know that company x has a history and this time valuation will based upon reality and not upon grandiose guidance.
Again, this is just my opinion based upon many years of experience. I am not sure I could locate any statistical information supportive thereof.
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