Perceived Reality Trade Can be Profitable

Many things in the stock market are counterintuitive. On balance, the market takes in all the good news about a company and reacts accordingly. Similarly, the market considers all the bad news about a company and takes action to adjust its perceived valuation.

This, of course, is what it is all about–perceived valuation, perceived reality, and perceived expectations.

Usually, when a company reports good news, the market reacts by bidding up the price of the stock. The market takes in all the available latest information about a company, and reacts with sellers to determine a new valuation.

Sometimes, however, the opposite can happen. Very occasionally, a company can report bad news, or less than expected news, and the stock will go up anyway. If you come across a situation like this, pay close attention because you may have just found a real moneymaking security.

Take, for example, Actions Semiconductor Co. Ltd. (NASDAQ/ACTS). Here is a Chinese company that makes semiconductor parts for personal media players. The company was founded only recently in 2001.

In its latest quarter, the first quarter of 2006, the company reported less than inspiring financial results, yet the stock went up.

According to the company, its revenues for the first quarter of 2006 (all figures are in U.S. dollars) were $35.8 million, which represented only a modest 4.4% increase over revenues of $34.3 million generated in the first quarter of 2005, and a 10% decrease from revenues of $39.9 million for the fourth quarter of 2005.

Net income for the first quarter of 2006 actually fell to $14.9 million, or $0.17 per diluted share, compared to $17.9 million, or $0.22 per diluted share in the first quarter of 2005.

The company’s forecast for future growth is modest, yet the stock recently popped higher to its current range between $11 and $12 per share, up from only $7 per share two months ago.

In this particular case, the perceived reality of the company’s success is much greater than its actual performance. There’s a lot of hype in the company’s stock price solely because it is a “China play.”

You can make a lot of money trading stocks like these, because the market is just so intent on bidding up the price of the stock regardless of the company’s fundamentals outlook.

So, if you find a stock that’s going up in price on seemingly weak news, put this stock on you’re radar screen. A perceived reality trade can be very profitable when the conditions are right.