Bring On the Pain!

Lowering guidance can bring on a world of pain for a company. Not only does the stock take a hit when the news is announced, but it can also continue to fall for quite a while afterwards. Investors face a dilemma: Is it time to join the mad dash for the exits, or is it a buying opportunity in disguise?

A guide to the future
It's not always easy to tell whether your company is having a fire sale or burning down. With the help of Motley Fool CAPS, however, understanding the difference is now a whole lot simpler.

The investor-intelligence database compiles the opinions of more than 105,000 professional and novice investors about stocks they think will outperform the market and those they think will not. Pairing that information with companies that have recently lowered their guidance should help us decide which of the stocks are hotter than hot and which ones are not worth wasting water to douse. A high CAPS rating with lowered guidance could present you with a real deal.

Here are five companies that have recently guided lower, coupled with what CAPS investors think:

Company

Period

Analyst Est./Previous Guidance

Updated Guidance

CAPS Rating (out of 5)

Dick's Sporting Goods (NYSE: DKS  )

FY09

$1.50

$1.22-$1.36

***

LTX (Nasdaq: LTXX  )

Q408

$0.08

$0.00-$0.03

**

Pacific Sunwear (Nasdaq: PSUN  )

FY08

$0.67

$0.59-$0.64

**

PetSmart (Nasdaq: PETM  )

Q208

$0.34

$0.26-$0.30

****

SMART Modular Technologies (Nasdaq: SMOD  )

Q308

$0.17

$0.05-$0.07

*****

Sources: Briefing.com; Motley Fool CAPS.

Now, this isn't a list of stocks to buy. Investing is rarely foolproof, so instead, consider this a list for further research.

Remember this
We'll refrain from calling it a "perfect storm," since that phrase is a little overused these days, but SMART Modular Technologies is being buffeted on all sides by continuing weakness in DRAM memory prices, higher-than-expected taxes, and product introduction delays. All this is also causing it to lose market share to rivals that also offer memory modules. Oof!

It's certainly easier to forgive a company when it's a general market malaise that causes a setback, which is how weak DRAM pricing could be considered. That's an outcome that will impact others in the industry, like Micron (NYSE: MU  ) and SanDisk (Nasdaq: SNDK  ) , and shouldn't alter the landscape dramatically. But when you're unable to qualify customer module configurations because one of your suppliers has a setback, and then you have slower business in one of your low-tax regions, causing your overall rates to climb ... well, the market obviously won't like it.

Yet the pricing issue seems to be firming, new product initiatives are gaining traction, and the company reports end-user demand remains steady. That could mean the market's reaction is more overreaction than deliberative analysis. That's what CAPS investor seavirostek suggests when he sees the new price giving the company a very low multiple:

When the market over-reacts on bad news for a $5 stock, hey! whoopee! it's down 17% the p/e is 6.54!

Similarly, FoolNewb thinks the risk-reward ratio is skewed at these prices:

At prices this low seems like a good risk. Other Caps players with high ratings are bullish, and all the numbers look decent.

Guide on!
Looking at stocks whose shares have taken a dive on diminished outlooks can be a painful experience. Your input, though, can help guide other investors to higher prospects for growth, even in the face of lower guidance. Head to Motley Fool CAPS, and let your voice lead the way.

Pacific Sunwear of California and PetSmart are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of PacSun, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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