Choose Calm Over Crazy When Bad News Hits

You don’t always need to be a licensed professional to recognize crazy when you see it…

Sometimes, you can just look at the stock market – especially during earnings season.

Sprouts Farmers Market (SFM) is a good example…

The company operates more than 370 stores across the country. It focuses on natural and organic foods.

Imagine smaller versions of Whole Foods Market or bigger versions of local, independent farmers markets. These types of stores have become more popular as Americans become more health-conscious.

Our Power Gauge system ranked Sprouts as “neutral” from late April through the end of July. And for all intents and purposes, it seems like an ordinary, still-developing business.

But that didn’t stop the company’s share price from going crazy in recent months…

It all started on May 5. Sprouts’ stock plunged 24% that day.

Now, Sprouts was still the same company on May 5 as it was on May 4. And we all still lived in the same health-conscious landscape on May 5 as we did on May 4, too.

However, one change that day caused investors to throw out common sense. Crazy roared to the forefront.

But as I’ll show you today, that isn’t the best reaction for investors when bad news hits…

Sprouts reported its most recent financial results and reduced guidance on May 5. And in short, it said customers were reacting to inflationary price increases by buying fewer items.

One Bank of America analyst didn’t just downgrade the stock due to the bad news. He issued a rare double downgrade from a “buy” rating straight to “underperform.”

Another analyst even nonsensically asked if Sprouts would “do something more radical” or some sort of “strategic alternatives.” Sprouts Chief Financial Officer Chip Molloy politely declined, saying, “That’s not part of our thinking.” I’m sure his preferred answer would’ve been unprintable.

Please don’t think I’m suggesting we should always just dismiss bad news as investors…

Sometimes, bad earnings and guidance (and estimate reductions) really indicate meaningful change for the worse. That’s why we include this type of data in our Power Gauge model.

Often, though, bad quarters just happen… to one company, many companies, or all companies. That’s a part of business. Not every company can go up forever.

Notably, the Power Gauge didn’t budge on Sprouts after its bad news on May 5. It stayed “neutral.” That means the system’s other factors more than offset the dismal report.

Throughout the next quarter, the company ignored the crazies. It did what good managers do. It gently adapted its business practices to the new reality of rising inflation.

By August 3, Sprouts had already climbed 14% off its May 5 close. And then, on August 4, Sprouts reported the next quarter’s results…

The news wasn’t exactly stupendous. But it was less bad than the May 5 news. And the company’s new data and guidance confirmed that it had been adapting.

Sprouts’ stock jumped another 13% that day. That brought it back up to roughly where it was three months earlier. And by the way, the Power Gauge now rates it as “very bullish.”

Not all ill-conceived selling waves reverse so quickly. But at some point, if the panic is unwarranted, reality will take charge and leave all the crazy sellers in the dust.

What does this mean for you as an investor?

If a stock you own goes crazy, separate from the mob. Stay calm. Be thorough and objective instead.

The Power Gauge is terrific at helping folks do that. Its 20 different factors allow us to see more than 4,000 stocks at all different angles – from their financials to their technical setups.

Sometimes, the crazy swing is warranted.

But don’t just follow the mob if a stock goes crazy. Decide what to do yourself.

Good investing,

Marc Gerstein

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