The Hub of the action (or, Food for Thought)
05/02/18
When food-delivery company GrubHub (GRUB) got walloped after releasing earnings yesterday (falling more than 11% intraday), the first reaction of some traders—other than surprise given what were very good headline numbers—may have been to buy the drop.
GrubHub (GRUB), 10/3/17 – 5/1/18. GRUB daily chart. Reaction to earnings

Source: OptionsHouse

After all, GRUB followed up on an outstanding 2017 (+91%) with a market-beating 2018, running to record highs while the broad market entered a correction in February, and enjoyed a 41% year-to-date gain as of last Friday. Buying outperforming stocks at a discount is a great idea, as long as the discount is an aberration.

GRUB posted a 33% earnings beat and topped revenue estimates, but some of the below-the-headline metrics—while showing improvement—nonetheless came up short of analyst estimates: Daily average “grubs” (orders) increased in Q1, but by less than expected; ditto for gross food sales.1

These weren’t huge disappointments, by the way, but they may have provided the perfect “excuse” for yesterday’s dump, especially in light of ongoing concerns (valid or not) about GRUB losing market share, and the extent of its recent price surge relative to the rest of the market.2  The following chart shows GRUB’s performance vs. the S&P 500 (SPX):

GrubHub (GRUB) and S&P 500 (SPX), 6/25/14 – 5/1/18. Wide GRUB-SPX spread

Source: OptionsHouse

Although GrubHub still controls the lion’s share of the food-delivery business, UberEats is currently the faster-growing service in the US, something that is potentially attributable to continued expansion in the space as a whole, and a relatively low barrier to enter the business.3

GRUB has only been publicly traded since 2014, so it doesn’t have an extensive history of post-earnings price patterns (17 quarterly releases in all, including yesterday’s), but what information there is suggests yesterday’s sell-off may not be an ideal buying opportunity, even for GRUB bulls who like the company’s longer-term prospects. Consider the following:

  • GRUB has closed below the close of earnings days more than 55% of the time in the first four days after an earnings release, and the median return from the close of earnings day to the closes of each of those days was negative.

GRUB’s performance was even worse after it closed lower on earnings days (as it did yesterday):

  • There have been only six times other than yesterday that GRUB ended earnings day below the previous day’s close, but over the next five days the stock only twice closed above the earnings day closing price; after four days, in fact, the stock was lower in all six instances, with a median return of -1.37%. For reference, the following chart shows the three most recent examples—May 3, 2016, October 26, 2016, and February 8, 2017 (marked with the green circles).
GrubHub (GRUB), 3/23/16 – 5/2/17. GRUB daily price chart. Down closes on earnings day

Source: OptionsHouse

Yes, you have to be wary of reading too much into six examples, but it’s also true the consistency among these examples, especially in light of the stock’s recent price action, shouldn’t be dismissed out of hand. GRUB has been trending lower since its mid-March high above $112, and the stock has since formed two lower swing highs and lows—and yesterday’s low broke below the second of those lows.

As tempting as it can be to try to capture a bounce in a bullish momentum stock that’s taken a dip, sometimes that dip can be a little bigger—and last a little longer—than initially thought.

 

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1 MarketWatch. GrubHub's stock drops after earnings, as DAG's were a bit shy of expectations. 5/1/18.

2 SeekingAlpha. Why We Aren't Chasing GrubHub Above $90. 2/13/18.

Recode. Uber Eats is the fastest-growing meal delivery service in the U.S. 4/18/18.