These 3 Earnings Warnings Serve as a Great Investment Opportunity

Where oh where has the bullishness gone? The jobless recovery has been walking a tightrope of success on the heels of strong corporate earnings over the past few quarters, but a recent string of earnings disappointments is attempting to put a quick end to the bulls' parade.

The thing to remember is that investors often overreact to the downside just as they often do to the upside. While certain earnings warnings are a clear red flag to stay as far away as possible -- see nearly every solar stock for confirmation of this -- not every earnings warning is a clear sell indicator. In fact, reduced earnings guidance could provide the perfect entry level for the long term for highly profitable companies. Here are three such companies that could make for exceptional values after recently dropping the ball.

Cisco Systems (Nasdaq: CSCO  )
I'm not inclined to believe that Cisco's best days are behind it, despite the fact that the company lowered its long-term revenue growth forecast from the 12%-17% range to a more reasonable 5%-7%. The company plans to focus on beefing up its profitability and on cost-cutting initiatives that should save it $1 billion annually. According to CEO John Chambers' forecasts, earnings should actually grow quicker than revenue over the next few years -- a bullish sign for investors.

The fact of the matter remains that competition in this sector is fierce, and both of Cisco's rivals, Juniper Networks (NYSE: JNPR  ) and Hewlett-Packard (NYSE: HPQ  ) , are at near-historic lows relative to their earnings multiples. While I think all three represent great values, Cisco's recently established dividend (now yielding 1.5%) and huge net cash position of nearly $28 billion make it a potential top pick.

Best Buy (NYSE: BBY  )
I know how unpopular a pick this will be, considering that Amazon.com (Nasdaq: AMZN  ) has beaten Best Buy on its own turf. But there is simply too much earnings power here to assume Best Buy won't eventually level the playing field -- or at least curtail its tumultuous drop-off in earnings.

Plenty of Fools think Best Buy's best days are behind them, including Alyce Lomax and Rick Munarriz, who both make several good points. I, however, feel that if Best Buy continues to rapidly build its online presence and downsize itself, focusing more on mobile and tablet hot-spot stores, it should come out the other side as a stronger company. Let's not forget that even with the company's reduced guidance (sans share repurchases), Best Buy is still only valued at around 7 times forward earnings with a dividend approaching 3%. Long-term investors take note!

Perfect World (Nasdaq: PWRD  )
So much for a perfect world. For investors, their perfect world turned into more of a Tim Burton nightmare yesterday following the company's earnings guidance shortfall. Perfect World cited the need to lengthen the current life cycle of its games as the main reason it reduced its revenue outlook from $118.3 million to $109.8 million. But all hope isn't lost -- in fact, now may be just the time to buy.

Perfect World clearly stated in yesterday's press release that these slow-down trends aren't anticipated to extend beyond the third quarter. Let's also not forget that even with guidance reduced, this still represents roughly a 25% year-over-year jump in revenue. As the company is currently valued at a minuscule forward earnings multiple of four and with $6.77 in cash per share, there's a lot of potential built into this Chinese game developer.

Are you tempted to buy into any of these names or simply too scared to purchase? Share your thoughts in the comments section below and consider tracking Cisco Systems, Best Buy, and Perfect World by adding them to your Watchlist.

The Motley Fool owns shares of Best Buy and Cisco Systems, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Amazon.com and Cisco Systems.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article, but he enjoys playing the contrarian. You can also follow him on CAPS under the screen name TMFUltraLong. 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 that only issues warnings when Chuck Norris is involved.


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  • Report this Comment On September 18, 2011, at 11:45 AM, Risky88 wrote:

    Lets remember that we are long term investors.

    So ask yourself.

    Would you feel safe holding BBY for 10 years.

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