Why Did My Stock Just Die?

Once again the markets reversed course, but your stock is taking an even bigger nosedive. Don't panic, though. 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)

Thursday's Change

Life Partners Holdings (Nasdaq: LPHI  ) ** (19.7%)
rue21 (NYSE: RUE  ) *** (11.5%)
CNinsure (Nasdaq: CISG  ) ** (10.5%)

The market dropped 171 points yesterday, or 1.5%, so stocks that went substantially further down are pretty big deals.

The devil's in the details
Other than how long the insured person has to live, there's not much difference between life settlement policies and viaticals such as those sold by Life Partners Holdings and Imperial Holdings. Generally speaking, if it's two years or less, it's considered a viatical, while over that, it's a life settlement.

But life expectancy plays a far more critical role than just determining which pigeonhole to place it in. As Life Partners has discovered, the accuracy of its actuarial tables can make or break the company. The SEC notified the life settlement specialist that it had issued a "Wells notice" to it to cover all the top executives in the company as it was investigating whether they had played fast and loose with the life expectancies of its insured. The shorter the life span, the greater the amount of money investors could expect to make.

By suggesting its insured don't have very long to live, a company would be able to attract more investors. A Wall Street Journal investigation last December found 95% of Life Partner's insured were still alive after their expected demise. God bless 'em, but maybe the life settlement leader needs another doctor.

Earlier this month, its home state of Texas announced it was suing the company for failing to comply with its subpoenas. What all this showed CAPS member BuffettJunior1 is how important it is to have a good, trustworthy management team:

I used to own this stock and it was one of the few mistakes I've made in all my years of investing. What this company had [taught] me was that management is the number one thing to look at before making any investment decision.

You can tell us on the Life Partners Holdings CAPS page whether you think these investigations will be the death of the life settlement leader.

Off the market
With less than half the nation's youth able to find work this summer, it's not surprising investors are ruing the day they put their money in teen retailer rue21. Its second-quarter earnings report was something of a mixed hobo bag as revenues were up 21% from the year-ago period and profits at $0.31 a share missed expectations by just a penny. But comps were flat, meaning its sales growth came from new stores, and it missed the growing trend of consumers pushing back-to-school buying closer to the actual date.

rue21 said shoppers typically start buying school items in July, but that it's now been pushed to August, or even September. As a result, it didn't have in stock the items they were looking for, like sandals, shorts, and dresses (now if we could only get retailers to stop putting Christmas items out in the summer, that would be a real accomplishment!).

rue21 wasn't alone; Aeropostale (NYSE: ARO  ) and Pacific Sunwear (Nasdaq: PSUN  ) also reported dismal numbers. Teens are an important demographic for retailers, but with just 48.8% employed this year, an all-time low, it's not surprising they're spending power is greatly diminished.

CAPS members are generally supportive of the retailer, with 73% of those rating rue21 thinking it will beat the market averages. Add rue21 to the Fools' new My Watchlist feature, and see if it can trend higher in the future.

Unsure of itself
Independent Chinese insurance agency and brokerage company CNinsure dropped yesterday for  no apparent reason, but with earnings due out next week, maybe investors wanted to get out of the stock early. Earlier this year it missed estimates and expenses soared as executive compensation rose out of all proportion. Last quarter it had another 23% jump in payroll expenses due to raises it handed out at the beginning of the year, though revenues rose 28% year over year.

Investors can probably expect pretty good results this quarter, too, as global rivals like Marsh & McLennan (NYSE: MMC  ) , Aon (NYSE: AON  ) , and Chubb have all reported strong results. A buyout proposal sitting on the table has investors like CAPS member ClevelOfficer hopeful it won't fall through so that shareholders will gain.

You can let us know on the CNinsure CAPS page whether you think it will go through or if it will have to play it solo.

Ready for a resurrection
Just because your stock has taken a beating doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look on Motley Fool CAPS at what's happened to your stock can give you an edge over other investors who just react to the market's lead. You can decide for yourself whether it's ready to come back from the dead.

The Motley Fool owns shares of Aon and Aeropostale. Motley Fool newsletter services have recommended buying shares of Aon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey owns shares of Aeropostale, but does not have a financial position in any of the other stocks mentioned in the article. You can see his holdings here.


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  • Report this Comment On August 26, 2011, at 4:22 PM, nviceo wrote:

    Mr. fool: the real difference between viatical settlements and life settlements is a viatical is someone with a life threatening illness. This is usually someone of younger ages than a life settlement and thus the premiums are much less should the insured outlive the life expectancy. A life settlement is a person of senior age without a life threatening condition and actuarily underwritten for life expectancy rather than medically underwritten from a standpoint of surviving a life threatening illness. life partners will have premium issues soon and then will have to rely on billing thousands of investors for premiums. Some will pay and some won't which could create a problem but they have been around a long time and had all those people who own policies in life partners bought stock instead they would be much worse off with loss of principal. Right now the investors in the policies have not lost a dime. But the investors in the stock of LP have.

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