Stock Of The Day: Williams-Sonoma Gaps Up, Stalls Out

After a move higher of almost 30%, shares of Williams-Sonoma, Inc. WSM are trading a little lower on Thursday. This is mostly because of two dynamics. One is profit-taking. The second is remorseful buyers taking advantage of the move to exit their losing positions at breakeven.

This is why it is our Stock of the Day.

The shares gapped higher after the company posted strong earnings. A “gap” occurs when a stock closes at one price and opens the next day at a price that is much higher. As you can see, that was the case with Williams-Sonoma yesterday.

The closing price on Tuesday was $137.24. The opening price on Wednesday was $172.02. Because there were no trades in between these two levels, there is a blank space or “gap” on the chart.

Investors bought aggressively because not only did the company report earnings that were better than estimates, it also raised its operating margin guidance. This was probably more important than the earnings beat.

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Operating margin is the percentage of profit a company makes after all its costs and expenses. In the quarter, the operating margin was 17.8%. This means that for every dollar of sales, the company earned 17.8 cents.

Going forward, Williams raised its operating margin guidance to a range of 17.8% to 18.2%. If operating margins are increasing, it means the company is becoming more efficient.

But the move higher has stalled out. There are two reasons for this.

The first is profit-taking. Whenever a stock makes a large move higher, there are traders and investors who will take advantage of the move to lock in profits.

The second reason is “buyer's remorse.”

As you can see on the chart, the stock made a large move higher in May and formed a peak around the $172.50 level. Some of the investors and traders who bought at the peak came to regret their decision to do so after the price plummeted. They have held onto a losing position ever since.

Now that they have a chance to exit their positions at breakeven, they are placing sell orders. These orders and the orders from the profit takers have, at least for now, made the rally stall out or maybe even end. There is a chance the stock will head lower.

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