Don’t Act Too Quickly or You Could Get Burned

Back in April, my colleague Rick Pendergraft wrote about the troubles he saw facing Starbucks (SBUX). A few days later, the company’s stock fell almost 11 percent on reports that it would likely miss its second-quarter earnings numbers.

Starbucks investors who followed Rick’s recommendation to get out could have made a nice little profit.

Those who didn’t get out of Starbucks immediately saw another chance to profit. On July 1, the company announced that it would be closing 600 stores and cutting the number of new stores opening in 2009 by half. This bad news for Starbucks looked like great news for investors shorting SBUX. It meant that the stock price would plummet, and anyone holding puts (options that go up in value as the price of a stock goes down) would be sitting on huge gains. Right?

Not so fast. Sometimes when bad news is announced, it is actually good news for the company. This was the case with Starbucks. Investors saw the store closings as a sign that the company would cut loose underperforming locations in an attempt to improve overall profitability and margins. The bad news for Starbucks actually turned into good news for the stock, which traded up as high as 4.6 percent in after-hours markets.

The lesson you can learn from this is that when a company reports bad news, it doesn’t always negatively impact the stock. And when it reports good news, it doesn’t always positively impact the stock. This is an important lesson to learn, as you could get burned quickly if you jump into a trade assuming you can quickly profit on good or bad news. It always pays to sit back and let the market digest the news before you act.

[Ed. Note: Sometimes the easiest investing advice – like investment analyst Christian Hill’s suggestion above – is the best and most effective at helping you build your wealth.]