These three companies just didn't live up to Mr. Market's expectations last week. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down.
For whom the bell Tolls
Luxury-home builder Toll Brothers (NYSE: TOL ) is our first underperformer today -- and it's a juicy one.
Toll Brothers was expected to lose money to the tune of $1.79 per share, but it blew those analyst estimates out of the water with a $2.93 loss per share. Nevertheless, the stock scored a gain of just under 2% for the week.
The market's rosy view of this report rests on management's even rosier forecast for the housing market. CEO Robert Toll saw signs for optimism:
- The backlog of build orders grew quarter over quarter for the first time in three years.
- Homebuyers do still cancel the occasional orders, but the cancellation rates are slowing down.
- The number of signed contracts per community under development increased 32% over the year-ago period. That's the closest metric to the retail sector's key same-store-sales figure.
So Toll Brothers is raising prices in a few communities to take advantage of what Mr. Toll thinks is a housing market in recovery. "We believe that customers are recognizing that now is the time to get into the market," he says, to take advantage of low, low prices in an unrivaled buyer's market.
Regardless of whether that turns out to be true, housing stocks certainly had a good time last week, with D.R. Horton (NYSE: DHI ) rising 8% and Hovnanian (NYSE: HOV ) making a 34% leap. If Mr. Toll is reading his tea leaves correctly, this could be your last chance to lock in ultra-low prices before the depressed housing sector bounces back with a vengeance. Do you believe it -- or is this recovery just a head-fake before another fall? Feel free to discuss in the comments below.
Waiter! There's a lump in my earnings!
Across the Pacific in China, wind-turbine manufacturer A-Power (Nasdaq: APWR ) reported earnings of $0.14 per share. The average Wall Street analyst wanted to see $0.20 per share, and investors haven't been too happy with the miss.
A-Power is both young and small. Its wind-power products are based on technology licensed from German and Danish engineering companies. Orders are coming in fits and starts, which means lumpy earnings at best. Mr. Market didn't cut A-Power any slack for that expected and forgivable lumpiness, though: The stock fell 12% last week.
Still, as I see it, lumpy earnings can mean opportunity for patient investors with an eye for value. Moreover, if the company's wind-power focus makes you nervous, you should know that A-Power is also moving into solar panel and biofuel technologies. A-Power is becoming an eco-friendly energy provider for all tastes in the biggest and hottest market on Earth. You might want to take a closer look while this discount lasts.
The future's so dim, you can sell your shades
The green-power pain doesn't stop there, though. Michigan-based solar-panel maker Energy Conversion Devices (Nasdaq: ENER ) also failed to impress the Street, with a loss of $0.37 per share. The consensus pointed to a much smaller $0.06 loss per share. ECD also missed revenue forecasts by nearly 10% as sales fell from $82.4 million last year to $51.4 million this time around.
CEO Mark Morelli explained the miss by citing weak demand from the commercial-construction sector stemming from "deferred reroofing projects and project financing constraints."
This downbeat report followed on the heels of analyst downgrades, and this stock has shrunk to the $11 range from the low $70s per share a year ago. This makes ECD the hardest-hit of all the major solar power players, closely followed by the massively negative returns of SunPower (Nasdaq: SPWRA ) and Evergreen Solar (Nasdaq: ESLR ) .
The trick to success in the sun-power market seems to be positioning yourself in the right market at the right time. At the moment, you don't want to sell raw materials like solar wafers because of a huge price war in that subsector. If you're lucky enough to sell finished end-product panels, you don't want customers in commercial construction. Conditions will change over time, but these stocks could hurt you even more while you wait. In the meantime, I'd take a wait-and-see approach and invest in tech stocks with brighter prospects.
Until next week
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps and which ones are stuck in the mud for real. Let me know which you think these are in the comments below.
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