Don’t Waste Your Time

There was an interesting article in Barron’s this weekend about stocks that will have to take charges against income because of impaired goodwill.  They bought companies and paid more than the assets of the purchased companies were worth.  The amount over the asset value is on the buyer’s books as goodwill.  Because of accounting rules, companies have to reevaluate the goodwill on their books and if there is a drop in value take a charge against earnings.

So Barron’s hired Audit Integrity to evaluate which companies might have to take a charge  this year. They have a methodology for calculating the probability of negative earnings surprises. It is a forensic accounting exercise, they look to see if there are signs of trouble on the company’s balance sheet.  In this case, they are looking at companies that use aggressive accounting.

In the article they mentioned several companies that recently took a goodwill impairment charge.  Let’s look to see if that was already discounted by the market or lead to a surprise and thus a large move in the stock.  That is what we need to use this information in our trading.

NYSE Euronext, NYX, would have had a profit if not for the charge that it took last week.  They announced earnings on February 9th.  If you look at the daily chart, there is no sign of a large price bar on the 9th or 10th. The price is fluctuating within the trading range of the week before.

The stocks which Leslie Norton discusses in the article which moved on earnings announcements where all financial stocks, Fifth Third Bancorp, Regions Financials,  and Hartford Financial.  It seems to me, without investigating any further, I did look at Regions Financial’s stock chart, that the movement has to do with the volatility of financial stocks not the goodwill impairment.

Transocean (RIG) is on the list too and I bought a straddle last week looking for an increase in volatility and a possible spike when earnings are announced tomorrow.  Right now, the call is in the money, we will see if there is a move due to earnings this week.