Microsoft's post-earnings stock moves reinforce a key Club investing rule

Published Wed, Jan 25 20232:07 PM ESTUpdated Wed, Jan 25 20234:01 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Microsoft 's (MSFT) latest quarterly earnings release offered further validation for one of Jim Cramer's long-held investing principles : Wait until the analyst conference call before making a trade. Microsoft stock climbed between 3% and 4% in afterhours trading Tuesday right after the software giant delivered a slightly better fiscal second quarter than Wall Street anticipated. But investors who jumped on the stock move — expecting shares to climb further on the earnings news — were in for a rude awakening. Once Microsoft's management team began a conference call with analysts about 90 minutes after earnings hit the wire, they laid out a softer-than-expected guidance for the company's third quarter. That development sent the stock tumbling in extended trading. The stock remained down Wednesday but had recouped some of its earlier losses. Shares of Microsoft were down around 0.7% Wednesday afternoon, at $240.34 apiece. Investors who bought the stock when it was up in afterhours trading Tuesday are now sitting on a sizable paper loss. More precisely, if an investor bought shares of Microsoft when they were up 4%, at roughly $252 apiece, they've seen their investment decline about 8%, based on Wednesday's intraday lows of around $231 a share. By contrast, investors who refrained from trading until listening to the earnings call were rewarded for their patience. And if they still maintain a long-term conviction in Microsoft and want to add to their position, they have a better entry point to do so. At the Club, we remain long-term holders of the technology company but are remaining on the sidelines for now. It's not unusual for Microsoft's shares to reverse direction in the hours after it has released earnings results because the company only provides forward guidance on the subsequent conference call. There's no financial forecasts or qualitative commentary printed in the press release. Other companies handle guidance differently. Some will give directional targets for revenue in the earnings release, then provide a little more detail on the call. Club holding Danaher (DHR), which also reported Tuesday , generally falls into this camp. Another approach is to focus strictly on full-year forecasts and include any updates in each quarterly earnings release, as Procter & Gamble (PG) does. But even then management could provide more color around the guidance during the call. Some companies offer a separate conference call for analysts and journalists, while others do a joint call. But, either way, management may unexpectedly answer a pointed question with a market-moving answer. Stocks are forward-looking assets, so the market places a lot of weight on management's forecasts and the more-detailed commentary offered on these conference calls. While investors care about how the business has performed in the past, stocks ultimately trade on future expectations. This is why it's an ill-advised strategy to buy or a sell a stock before management offers insight into the business's near-term future performance. A little patience can go a long way. (Jim Cramer's Charitable Trust is long MSFT, PG, DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Satya Nadella, chief executive officer of Microsoft Corp.

David Paul Morris | Bloomberg | Getty Images

Microsoft's (MSFT) latest quarterly earnings release offered further validation for one of Jim Cramer's long-held investing principles: Wait until the analyst conference call before making a trade.