Markets don’t just react to events, they over-react. That means that a stock in an uptrend may head far higher than expected in a rally. Or a stock that’s selling off may get too oversold as stop losses keep getting hit, setting off new waves of selling.
Earnings season can sometimes cause some larger-than-expected moves in a stock if there’s a miss on either earnings or forward outlook.
The latest example is DocuSign (DOCU). Shares dropped 42 percent in trading on Friday, after the company reported an earnings miss and lowered its forecast.
The e-signature verification company has built a strong brand over the past few years for its security and ease of use. It’s no surprise that shares soared with the pandemic, but it’s also a business likely to increase going forward, not decline. Traders overlooked that the company’s earnings were still up more than 100 percent over the past year when shares were selling off.
With the stock now down over 50 percent from its 52-week high and trading at a price last seen at the start of the pandemic, shares look poised for a rebound from here.
Action to take: Investors may like shares here, as the stock is likely to recover and move higher over time. However, the stock is still in its high growth phase, so don’t expect a dividend for a while.
For traders, a short-term rebound looks likely. The February $200 calls, last going for $2.40, could deliver high-double-digit returns in the weeks ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.