One of the most frequent criticisms of the stock market is that the traders and speculators who drive daily moves are much too short-term in their focus. That argument is not without merit. In some instances, management teams are driven by their concern with the stock price to sacrifice long term investment, focusing instead on the current quarter’s P&L and looking forward only a year or so.
Even if we accept that the majority do not do that, traders who jump in and out of stocks have themselves only one goal, short-term profit, and many people feel that that is pursued to the detriment of long-term investment.
For those with a longer outlook, however, the short-term knee-jerk reactions of traders to certain events can set up some great opportunities, and we are seeing a good example of that right now.
When CEO Dara Khosrowshahi announced that he was leaving Expedia (EXPE) to take over at Uber, one would expect that stock to drop, but the seven percent or so decline that came over the next few days looked a bit overdone. No disrespect to Khosrowshahi who has by all accounts done an excellent job at Expedia, but there has been an element of “right time, right -place” to his success.
One of the most noticeable traits of the recovery from the recession has been that traditional retail has picked up slower than expected, while “experience” purchases such as vacations have been extremely popular. Khosrowshahi did a great job of spotting that trend and expanding into it, but it is set to continue, and therefore continue driving EXPE higher, long after he is gone.
Once the initial shock of the announcement faded, that logic became clear and EXPE recovered most of the lost ground. Over the last couple of days, however, the stock has dropped again, and is looking like opening a lot lower this morning. There are two reasons that could be the case.
One is that Trivago (TRVG) issued a profit warning this morning, and the drop is in reaction to that. The other explanation, is that the drop is a response to fears about the effects of Hurricane Irma. Both are understandable to those who understand traders, but neither make sense.
From a trader behavior perspective, as somebody who made a living in a dealing room for a couple of decades I can assure you that when a major news event takes place traders feel obliged to react in some way, even if the reaction is a bit of a stretch. I have written before of the time back in London when the Queen Mother had several times been wrongly reported to have died during an extended illness. At the time I was on a GBP/USD desk, and on one such occasion, as the “news” broke, a bored sounding voice piped up with the question “What did we do last time she died, did we buy it or sell it?”
That impulse to react to news regardless often leads to moves that make little or no sense, and this is one of those times. It makes no sense as a reaction to the Trivago news, as the two companies’ business models are completely different. One could even argue that if the price aggregation and referral model of Trivago is underperforming, that is good for Expedia.
If the selling is in anticipation of Irma, that is also more of an opportunity to buy than any logical move. It may cause some short-term disruption, but the long-term trends outlined above are still in favor of the travel giant.
Whatever the short-term reasons for a pull-back in EXPE, they pale in comparison to the long-term dynamics that are driving the stock higher. It is that, not the volatility in response to news, that should be the focus for investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.