Fundamentals Really Do Count

 | Aug 13, 2013 | 7:16 PM EDT  | Comments
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xone

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intc

Today, post the New York close, 3D printer maker ExOne (XONE) dropped 16.35% in after-market trading after reporting second quarter earnings and 2013 outlook.

That's 16.35%. We're talking $12.30 a share. And that comes right after a market session that saw the stock climb almost 7% or $4.91 a share.

If you focus on the usual financial fundamentals, it's hard to understand the magnitude of that drop. After all, while the company did report a loss of 8 cents a share, that was what Wall Street had projected. Revenue climbed 97.2% year over year to $9.23 million. That was slightly ahead of the $9.11 million consensus.

Guidance for the full 2013 year was a bit disappointing, true. For 2013 the company now projects revenue near the lower end of its former guidance range of $48 million to $52 million. The lower end of that range is slightly below the $50.46 million Wall Street consensus. But considering how lumpy ExOne's sales are -- in the second quarter it sold four of its very largest S-Max 3D machines -- and that ExOne's "warning" talked about the timing of end of the year sales, this guidance wasn't all that alarming.

To understand the reason for the stock's huge afterhours drop, I think you've got to look at the "other" fundamentals. In this case it's not the fundamentals of earnings and revenue that explain the stock's movement, but the "fundamentals" of the stock as a market vehicle.

What does that mean?

Start with the tiny float for ExOne shares. The total number of shares that can be traded is just 6.78 million. (Technology stock Intel (INTC), for comparison, trades a daily volume of 41 million shares.) In other words, it doesn't take much volume to move this stock BIG.

Then look at the chart. ExOne went public only last February. The shares spent a couple of months building a base and then exploded upwards. Starting from $31.79 on April 22, ExOne shares rocketed 138% to $75.67 at the Aug. 13 close. A lot of owners of ExOne are sitting on big paper profits that can only be turned into cash if they sell.

The last two times ExOne reported earnings the stock plunged to the then 20-day simple moving average and then held there. Going into today's earnings event, the 20-day moving average was at $64.50. I'd think that a lot of the owners of this stock know that history and their first thought on seeing the stock start to fall was probably, "Let me sell now before this drops all the way to the 20-day moving average again." In after-hours trading the shares stabilized at $63.22, just a tad below the 20-day moving average.

And one final "fundamental." Going into earnings, this was one heavily shorted stock. The short interest stood at 28%. The short interest is the number of shares sold short by investors betting the stock will fall divided by the total daily volume. At 28% ExOne had a lot of market players betting against it going into earnings.

At some point a big short position turns into support for a stock once short sellers decide the stock isn't going to fall quickly anymore and buy shares to cover their short positions. (You short a stock by borrowing shares and then selling them. Your bet is that you'll be able to replace those borrowed shares with shares you've bought in the market at a lower price.)

The fundamentals say that ExOne could well stabilize at something like today's after-market price since it is so near the 20-day moving average and since so many shorts will be looking to cover and capture their profits. Stabilizing here is what I'd expect from a stock with ExOne's market fundamentals. If it falls further, I think you'll need to dig deeper into the other fundamentals, those of the company's business, for reasons.

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