High Expectations Often Spell Trouble

 | Dec 20, 2013 | 11:45 AM EST
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Great Expectations isn't a book. It's a set-up. I'm talking about the Dickensian nature of today's action in Nike (NKE), Tibco Software (TIBX) and Red Hat (RHT), because the wild trading in all three is about what people expected vs. what they got.

It's hard to imagine the expectations being any higher than those going into Nike's quarter. The newly minted member of the Dow Jones Industrial Average had been showing a level of momentum in China that was spectacular, and the U.S. was running very hot, the hottest in years. So when this Action Alerts PLUS charitable trust holding reported, we were braced for disappointment.

Sure enough, the company reported a terrific quarter, but not terrific enough, given the rabid nature of traders who want to see much better than expected numbers when a stock is up 50%. What was wrong? Nothing. The company has strong demand for its products across the board, excellent gross margins with an amazing performance in Western Europe, with 15% revenue growth and 23% futures growth, the best predictor of how the company will do. China, however, grew only 5%, with 1% futures growth, and that wasn't enough for those who were looking for the big upside surprise.

It pretty much didn't matter that everything else was all-systems-go. Plus, the company is investing for the future, and that meant more money not flowing to the bottom line. Expectations have now come down, and to me, that makes it safe to buy.

If you read the release for Tibco Software or listen to the management on the conference call, you would believe that the stock should be up 10%, not down 14%, because they were so ebullient and effusive about the big contracts they signed. But Tibco is one of those business-analytics companies that's highly valued for its momentum, and a 2.5% gain in license revenue, a key metric, showed a decline in momentum despite the robust orders.

Tibco is really being hammered, though, for its inconsistency. The company has become hit-or-miss, on fire one quarter, cooled down the next, and investors are tired of hearing that everything is fantastic when "fantastic" means shoot the lights out on every metric. They are also weary of having to hear about sales force problems. Nobody cares; they don't want excuses, they want blow-away sales and earnings, and Tibco didn't deliver.

But Red Hat did. Here's a company that supports enterprises that are on the cloud, that's measured on its billings, and the last quarter didn't show the kind of billings growth that the momentum investors expect from a cloud company. So they whacked it and whacked it some more.

Jim Whitehurst, the terrific CEO, came on "Mad Money" and told us that the business is going to be smoking in 2014, and that the way the firm accounts for the billings obscured what could be tremendous strength. I gave Whitehurst the benefit of the doubt, because he seemed totally heartfelt and bummed that people didn't get that, and he wanted people to run to the stock, not away from it. Sure enough, everything he said on "Mad Money" about the real nature of the previous quarter was right, and the stock has been soaring. People were just too cynical about this fascinating company, which has partnered with Salesforce.com (CRM) in so many ventures.

Yep, people had too high expectations for Nike and expectations of consistency from Tibco, and that caused disappointment in both. But Red Hat was loathed for that last quarter's miss and had no expectations whatsoever. Those are the kinds of stories you must always be on the lookout for, especially when the quarter that lowered expectations wasn't even bad at all. 

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