7/27/2012
By Charles Payne

More Articles by Charles Payne

Fanciful Facades?

The Efficient Market Hypnosis suggest stocks are priced exactly where they should be priced so in order to beat the market you have to take extra risks.

There are different levels of EMH that boil down to these three notions:

> Stock prices reflect public information of past facts
> Stocks prices reflect all public information
> Stock prices instantly reflect even hidden (insider information)

This week's earnings reports belie the idea the market is all-knowing and that share prices reflect public information. In fact, these days stock prices more often than not reflect fear and worst-case scenarios. This makes investing difficult; even when companies do well the street continues to guess that at some point the company or something that affects the company will take a turn for the worse.

But, how could the market be so efficient if CAT came into Wednesday's session 30% below its 52-week high?

Caterpillar posted its best quarter - ever! And management raised its full year guidance. Yes, the market has been punishing this stock on each news item to the point where its share price is nowhere near correct.

Key takeaways:
All-time record sales and revenue $17.37 billion, +22% year to year
All-time record earnings of $2.54 per share (street was at $2.28), +67% year to year
Brazil - improving because of lower monetary policy in late 2011
China - expected to take more aggressive monetary easing
USA - transportation bill helps
Europe - will take some time to turn around
Non-USA job growth 6,347
USA job growth 6,020

More Examples

Wholefoods (WFM) beat by two cents and posted revenue in-line with consensus and the stock is set to soar. The point is shares were trading hands not at a valid price but at a worst-fear price and that's not efficient. The stock soared because the company continues to be popular with people who are willing to pay a premium; that is public news the market missed.

Tractor Supply (TSCO) posted earnings of $1.45, the street was officially looking for $1.39 but probably anticipated worse considering droughts and other farmer worries. There has been a boom in the farm industry for years and while the drought is devastating the longer term trend for farming remains healthy and solid.

Charles Payne
Wall Street Strategies