Why Did My Stock Just Die?

Your stock just took a nosedive -- but don't panic. First, let's see whether it had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities. Here's the latest crop of cratered stocks that could provide a possibility for profit.

Stock

CAPS Rating (out of 5)

Wednesday's Change

Telestone Technologies (Nasdaq: TSTC  )

****

(15.1%)

Newcastle Investment (NYSE: NCT  )

***

(8.4%)

Bank of Ireland (NYSE: IRE  )

***

(7.1%)

The market soared by 151 points on Wednesday, or 1.4%, as Armageddon on the Korean peninsula didn't arrive and a host of datasets -- though not all -- gave a glimmer of economic recovery. But stocks that went significantly in the other direction were big deals.

The devil's in the details
Although Allied Irish Bank (NYSE: AIB  ) and Bank of Ireland have been walking in lockstep in the good news-bad news department, they momentarily diverged Wednesday as Allied shot up by 13.5% while Bank of Ireland continued its descent.

Expect the divergence to be short-lived. It happened because of fear that Bank of Ireland is about to become an arm of the government, with the state's ownership interest in the bank soaring to as much as 80% from its current 36% position. The government has told the banks they can expect to raise much more capital to solidify their financial position, but Bank of Ireland's required cash cushion -- some 3.5 billion euros -- will probably come from the government, which will serve to significantly dilute existing shareholders.

This episode should serve to underscore what a sham the so-called stress tests were, as only seven tested European banks out of 91 failed -- and Allied and Bank of Ireland were among those that passed.

The U.S. tests were also a paper tiger, and the Federal Reserve is requiring the biggest banks to undergo a second round of testing. Only if the likes of JPMorgan Chase (NYSE: JPM  ) , Wells Fargo (NYSE: WFC  ) , and Bank of America can prove they're in good financial health and have adequate capital available to withstand a second recession. Presumably, the testing will be more rigorous than it was in the last go-round.

Although gkukreja1 admits that the risk of dilution is large for Bank of Ireland, this CAPS member is also betting that the bank will come out on the right side in the end.

[Bank of Ireland] is the only bank that has the potential of turning around in this Irish crisis. Everyone is dumping the stock but this is offering an excellent risk/reward opportunity. While there might be dilution in the near future, this stock should tide well into the recovery.

Deposit your thoughts on the Bank of Ireland CAPS page and let us know how long it would take to recover from a government takeover of the institution.

The sky's not the limit
Real estate investment and finance company Newcastle Investment has been on a tear, particularly after it reported very good third-quarter results earlier in the month. Yet over the past two days it has given back some of those gains, dropping by nearly 13%.

Much of Newcastle's gains were the result of $105 million worth of reversals in valuation allowances on its loan portfolio. Improved market conditions, loan restructurings, and the sale of one loan at a price well above its carrying value were the primary reasons for the reversal, but it also admits using "significant judgment" to assign new values. We've noted several times that banks are engaging in "extend and pretend" to keep their balance sheets up and have been releasing funds from loan-loss reserves at ever greater rates to improve their bottom lines.

Newcastle will have to hope that market conditions remain favorable enough to unload more loans to keep those numbers up, but CAPS All-Star nibs61 thinks the real estate market has hit its low and that Newcastle's ability to generate significantly higher returns is greater than the risk it represents.

Risky, speculative play but I think [it's] worth the crap shoot. Real estate is at its bottom and now you can get in cheap and wait for the rebound. Again, I said this one is very speculative so be careful.

A big disconnect
No doubt, Telestone Technologies' decision to dilute shareholders surprised investors and led to the decline in its stock price. It's been using its customer base with the Big 3 Chinese mobile carriers, including China Mobile (NYSE: CHL  ) , to boost revenue. Some CAPS members early on were warning about the potential for dilution, and All-Star member TSIF thinks the recovery will be a long slog but that Telestone ultimately will become a solid investment.

Margins remain strong at 20 %, ROA of 10%, ROE of 20%. QoQ gains of 278% should not have been expected, even in China's telecommunications arena. The very small float of 6.4 Million shares (now about 1 Million more) will keep Telestone volatile, but Telestone remains of interest to global and small cap funds.

You can track its progress by adding it to your Watchlist, where all the Foolish news and analysis about this stock will be aggregated for you in one place.

Ready for a resurrection
Just because your stock has taken a beating, that doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look at what's happened to your stock can give you an edge over other investors who just react to the market's lead.

That's why it pays to start your own research on these stocks on Motley Fool CAPS, where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether it's ready to come back from the dead.

The Fool owns shares of Bank of America, China Mobile, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in the article. You can see his holdings. The Motley Fool has a disclosure policy.


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