One of the odder habits in the investing world is when an individual stock will rise on a strong earnings report, and other companies in the same sector will immediately rise “in sympathy,” as the expression goes. Never mind if they operate in another corner of the sector almost unrelated to that of the reporting firm’s, they rise “in sympathy” on the good news. Lest you are led to believe this is caused by index buying, I can assure you it is not. I’ve heard this term since forever.
There were a couple of incidences that brought this to my attention this week. Some of my clients held shares in Children’s Place, a retailer of clothing for kids ages 0-12. Naturally, COVID had clobbered the stock, but they had made enough progress in the ensuing five quarters to get holders back up to a slight gain. Earnings were coming out Wednesday, August 18th, and I didn’t want to stand in front of them. All positions were liquidated Monday morning. Earnings were released, and it turned out to be the correct call, as the shares sold off after a middling result was reported.
Macy’s reported later in the week, and to everyone’s surprise, especially my own, they shocked to the upside. And what happened to shares of Children’s Place? They rose too, but this might have been due to overall market strength on Friday as well as “in sympathy.”
Which leads us to an interesting case of an accusation of insider trading by the SEC reported on the STAT Podcast “The Readout.” The former head of business development of a firm called Medivation, got word or simply was informed of the company being taken over by Pfizer, in the usually generous terms you find in biotech buyouts. But he didn’t buy shares of his own firm, he bought options in the shares of another firm called Incyte. While not direct competitors, they were in the same general field of cancer research. The bet paid off after the buyout of Medivation was announced, and the investor reaped a $100,000 profit on options of Incyte, with the SEC claiming to have reason that the buyer of the options of those shares would surely rise “in sympathy.” Which, as the podcast host pointed out, is a strange gambit, because it was Incyte that didn’t get bought out and a possible competitor was taken off the table as a takeover candidate.
The buyout took place five years ago. I’m not sure how the SEC proves this, or if it’s even a valid case of “insider trading,” but I can tell you the SEC would do better to focus on bigger fish than this. There are far bigger treacheries committed every day.