Selling the news is a common trading strategy in which traders buy a stock in anticipation of expected news, then sell once the event occurs. It’s a short-term strategy based on the psychology that the unknown is frequently better or worse than the known. Once traders have time to interpret the news, they find that it won’t mean much for the long-term outlook for the stock.
But sometimes news happens unexpectedly. In this case, traders may buy a stock after the news is announced. But in many cases, these still turn out to be sell-the-news events. Although many long-term investors don’t concern themselves too much with short-term news, they can still use this strategy to take some short-term profits if a stock becomes overbought.
This week, investors received news about three stocks that moved each stock higher in the immediate aftermath. However, 24 hours later, it’s a good time for traders to examine the stocks and decide whether to buy the rally or take some profits.
Activist Investor Starboard Acquires $1 Billion Stake in Pfizer
Pfizer Inc. (NYSE: PFE) stock jumped over 4% on Monday, October 7, on the news that Starboard Value, an activist investor, had accumulated a $1 billion stake in the company. That’s not newsworthy by itself, but the company plans to use its stake to force some changes at the pharmaceutical company.
At issue is the company’s post-COVID-19 strategy, which has involved growth through acquisition. Under current chief executive officer (CEO) Albert Bourla, Pfizer has spent $70 billion in M&A (mergers and acquisitions) since 2020. Many of these investments have not delivered an impressive return.
Starboard, which is enlisting the support of two former Pfizer executives, wants the company to return to a business model that emphasizes a disciplined financial posture and focuses on investing in novel drugs.
It’s important to note that short interest in Pfizer stock was up 14.4% in the last 30 days. That means some of the spikes could be due to short covering. After the initial spike, Pfizer's stock returned about 0.5%. Despite the recent move, PFE stock has still been down 12.3% in the last 12 months.
Arcadium Lithium Could Become an Acquisition Target
The catalyst for the move in Arcadium Lithium plc (NYSE: ALTM) comes on the news that the Rio Tinto Group (NYSE: RIO) has made a non-binding offer to acquire the lithium miner. ALTM stock is up more than 50% in the 48 hours since the news broke making it one of the leading performers among basic materials stocks.
Rio Tinto is already the world’s second-largest mining company. It has been taking steps to increase its lithium production, including potentially building Europe’s biggest lithium mine in Serbia. However, with those plans stalled, the company could be turning to growth through acquisition strategy.
Lithium is a core component needed for electric vehicle (EV) batteries, smartphones, and other electronic devices. Demand stalled in 2024 but is expected to remain strong for the rest of the decade.
Investors should note that the announcement did not include financial specifics. Because the offer is non-binding, it’s difficult to speculate on Rio Tinto’s degree of interest. That's not discouraging investors in the short term; analysts were already bullish on ALTM stock before the announcement.
Netflix Stock Remains Resilient in the Face of Downgrades
After falling over 2.5% on news that Barclay’s downgraded its stock, Netflix Inc. (NASDAQ: NFLX) is already approaching a new all-time high. That's because, on the same day that Barclay’s downgraded the stock, TD Cowen reaffirmed its Buy rating on the stock and raised its price target from $775 to $820.
While maintaining a price target of $550 for NFLX stock, Barclay’s lowered the company’s ratings from Equal Weight to Underweight. That’s the equivalent of a Sell rating.
The concern is over the streaming giant’s valuation. Netflix currently trades at 49.9x earnings and 37.7x forward earnings. Netflix has faced this question before. At levels like this, it has to prove that it can grow earnings on a path that’s consistent with that multiple.
For now, analysts believe the company will continue to capture market share based on its pricing power. And the revenue it generates from its ad-supported tier should support expectations for a 20% increase in earnings in the next 12 months.
