Last month was a good one for the broad market. The S&P 500's sizable 6.5% gain in June was the best month for stocks since October, capping off an incredible first six months of the year. It wasn't a winner for every ticker, though. A handful of familiar stocks ended June surprisingly in the red.
Veteran investors look at these setbacks and see the potential for some buying opportunities. But before you take the plunge simply because these names were discounted, take a closer look at what really went wrong, why, and what lies ahead.
What went wrong for who, and why
Last month's biggest losers among the S&P 500's constituents are Humana (HUM -1.77%), EPAM Systems (EPAM 0.26%), and Dollar General (DG -0.41%), down 10.9%, 12.5%, and 15.6%, respectively.
Dollar General's stock fell more than 19% in a single day early in the month in response to disappointing first-quarter numbers and equally disappointing guidance. Last quarter's same-store sales (comps) only improved by 1.6% versus analysts' expectation of 4.1% growth, while guidance for full-year comps growth between 1% and 2% is markedly lower than its previous guidance for growth between 3% and 3.5%.
A handful of downgrades kept bearish pressure on shares since then, as has the discount retailer's decision to issue another $1.5 billion worth of new debt.
The bulk of EPAM Systems' setback also happened in a single day early in the month. The stock plunged nearly 22% on June 5 after the software company dialed back its full-year revenue and earnings guidance. CEO Arkadiy Dobkin said, "After careful assessment of changes in our May and June forecast data, we have come to understand that pipeline conversions are occurring at slower rates than previously assumed, and we are also seeing some reduction in the total pipeline."
As for Humana, it didn't post disappointing quarterly earnings, though it did warn investors that future earnings could be disappointing. A Securities and Exchange Commission filing made in the middle of the month notes that an unexpected increase in covered surgical procedures is eating into its expected profitability for fiscal 2023.
Its projected per-share profit of $28.25 is still better than last year's $25.24 and is unchanged from its previous guidance. The fact that the insurer felt compelled to publicly disclose its rising costs, however, is a red flag.
The rest of the story on these three stocks
Experienced investors know that a stock isn't suddenly worth buying just because it suffered a rough month. There's always more to the story.
In Dollar General's case, it's the stock's 33% dip from last year's high due to challenges that surfaced before last quarter. While it performed like a champ when COVID-19 was at its worst, the wind-down of the pandemic exposed several company-specific concerns. For instance, it's now clear that many stores are understaffed, and the company is struggling to properly manage its inventory.
These challenges are being addressed, but the overhaul needed will take time. Dollar General itself could struggle during this process. It's a tough stock to own while it's regrouping, even with the sizable sell-off since late last year.
EPAM's lousy June is also just the latest chapter in a long major sell-off for the stock. Its shares currently sit nearly 70% below their 2021 high and are back within sight of last year's then-new 52-week low.
EPAM's is a sell-off, however, that makes much less sense than Dollar General's does. Revenue continues to grow near the same pace it did before and during the pandemic, and while this year is shaping up to be a slower one, it's apt to be a temporary headwind. Its recently announced partnership with Alphabet's cloud computing arm to help bring cloud-based artificial intelligence (AI) tools to enterprise customers put the company squarely in the fast-growing AI market.
To this end, the analyst community is modeling a resumption of its previous revenue growth beginning next year. Ditto for earnings.
Data source: StockAnalysis.com. Chart by author.
Lastly, while Humana's warning is a legitimate worry, unexpectedly higher costs aren't a new challenge for the insurer.
Although those costs could make this year a lackluster one, one year's insurance premiums ultimately reflect the previous year's costs, plus a profit margin on the order of 13%. This pricing model -- which broadly applies to the entire health insurance industry -- is largely why Humana has fared just fine for the past several decades even though the cost of administering healthcare has soared during this time. People have to have this protection, and they'll pay almost anything to have it.
To buy or not to buy?
Dollar General stock is best avoided for now despite its current valuation discount, while Humana and EPAM are buys simply because the market's current view of both stocks ignores the much bigger picture.
But these calls only apply if you were interested in adding any of these three tickers to your portfolio before June's tumbles. If they weren't a good fit then, they're not a good fit now.
Perhaps the bigger takeaway is understanding that a steep sell-off in a short period of time isn't enough reason to dive into a particular equity. It's just an opportunity to step into a particular stock while it's on sale.
