That’s what happens when traders are not sure what are going to happen and they start guessing. Speculation can dramatically increase a stock price or make it fall in the same way.
Most recently, as in yesterday, Verizon tweeted
that it would be making big news today. In honor of the special event, this post is up at 10am, rather than our usual post time of 1pm. Let’s look at the financial impact.
If you remember the 3 step stock picking process then you know that one of the steps to picking a stock is to check out the future prospects of a company. A successful new product means new revenue for Verizon. It also could mean more market share as the new offering could steal customers from AT&T.; AT&T; had an exclusive contract until June 2010. So let’s take a look at a chart of Verizon’s stock price for the last couple of months.
According to the efficient market hypothesis, all of the news related to Verizon is reflected in it’s stock price, so we will base our assumptions on that theory. This a a basic chart of the stock price and volume of trading for Verizon. The price had been falling until about July of 2010. That’s about the time that the exclusivity contract Apple had with AT&T; ended. If we assume that the rumor of a Verizon iPhone was believed to be true by traders then their speculation is what drove the stock price up. Traders saw the end of the exclusivity contract as a good thing for Verizon, even if an iPhone did not come out immediately, now it was legally possible.
So what will this do to the current stock price? Let’s take a look at the company. Valueline was nice enough to give us a free report on Verizon which I will reference, and they also did a nice comparison of AT&T; and Verizon. According to their report, prospects look bright and the stock should show solid appreciation for the next 3 to 5 years. They also mention the new LTE offering and FIOS. Nothing about the possible Verizon iPhone.
Typically, a rumor like the one about the iPhone does to a stock the same thing that helium does to a balloon. Temporarily inflated, but after a while, you’ll see it deflate. This is a market phenomenon called “buy the rumor, sell the news.” However, the short-term price change gives us an idea of what stock traders think will happen long term because of this news. We may see the stock price rise leading up to the announcement and even during the announcement. Short-term traders are buying and, like helium, inflating the price. In general, once the news is released, short term traders will already be out and the price could fall back to its pre-rumor price.
The good news about that is that if you are a long term investor and willing to hold the stock for a while, this could be a good time to buy cheap once the price falls a little. Another angle is to watch the shares of related companies like AT&T;, Google, Sprint, and Apple. You can see what the market thinks will happen long term to their stocks by watching what they do leading up to the official announcement.
Watch the live stock price in the minutes leading up to the announcement and afterwards to get an idea of how markets react to rumors and news. Some skeptics think VZ stock won’t get much of a long term boost, but only time will tell.
Update (10:29 AM EST)
Here’s an example of “sell the news” It’s the price of VZ stock so far this morning.