Expert: Steve Hach - 1/10/2012

Question
how can a stock lose money and go up?

In the past few days, Alcoa (AA) has gone up approx 10%, yet it came out with lower than expected earnings, a loss for the year, and announced they are closing 12% of their facilities. What am I missing?

Answer
Hi Al,
Because the market is not totally rational and efficient.
But, it is always right.
So, you can have big earnings and it will go down, and vice versa.
One thing to keep in mind, investors seem to love layoffs.  So, if AA announces it is closing old plants and laying people off, this may provide a boost to the share price as investors anticipate future earnings gains as the costs of old equipment and employees are removed.
Think about it, 12% of facilities gone, that will mean lots of people gone.
The share price isn't a function of what the company is worth TODAY, it is a guess based on future earnings and activity.
In the case of Alcoa, it may be the consensus that the worst is behind them and moving forward they will do better, so shares go up because people think it is a good time to buy.
Hope this helps,
Steve