Why Did My Stock Just Die?

Finding solace in the Federal Reserve's remarks that the economy was a little bit better than expected, the markets changed course and rose yesterday. But even though your stock took a nosedive, 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

Career Education (Nasdaq: CECO  ) *** (47.8%)
ReachLocal (Nasdaq: RLOC  ) **** (28.2%)
Vonage (NYSE: VG  ) * (15.6%)

With the Dow rising 178 points yesterday, or 1.5%, stocks that went down by large percentages are pretty big deals.

That's going to leave a mark
Underscoring just how strong Corinthian Colleges' (Nasdaq: COCO  ) earnings report was, Career Education continued to reel from the slashed profits it reported in its quarterly statements: Its CEO abruptly resigned, and the company's board chairman said the for-profit educator needed "fresh leadership."

Career Education, Corinthian, Strayer Education (Nasdaq: STRA  ) , and other profit-making colleges have been scrutinized for their aggressive recruitment practices and the high debt loads of former students -- as if students graduating from other schools don't graduate with a heavy debt burden and few job prospects.

But enrollments have slid dramatically, and for-profit education companies now face rising costs of regulatory compliance. Apollo Group (Nasdaq: APOL  ) reported that new student starts were down by a third, while Career Education saw a similar decline.

A year ago, CAPS member Loerke thought government intervention in the marketplace might hasten the demise of for-profit educators, but the real death blow will come from public universities.

Most of these traditional schools are now offering online and continuing education courses, often in remote parts of the globe, that use precisely the same business models that outfits like [the University of] Phoenix are using. Universities finance their traditional programs out of these for-profit enterprises. These schools have a huge leg up on the for-profit colleges: (a) zero taxes on endowment gains; (b) a reputable name/accreditation; (c) government support in the form of subsidies, grants, etc. Meanwhile, the for-profit schools only have tons of research showing that for-profit schools are the equivalent of quicksand for students.

Put Career Education on your watchlist and see whether it will be able to fight for survival with the equivalent of having one hand tied behind its back.

Out of reach
Is anyone really excited about Groupon's pending IPO anymore? Apparently, yes, if reports prove true that it may price higher by a dollar or two over its $16 to $18 current range. You won't find me buying in, though, and I probably should have just downgraded all such stocks the other day, when I noted that ReachLocal had no real competitive moat to protect it. None of these local advertising shops do, and while Groupon may have some name recognition and critical mass behind it, when there are low barriers to entry it makes it tough to survive.

ReachLocal disappointed the market, missing profit and revenue projections and saying the immediate future didn't look all that promising either. I should point out that similarly situated Local.com did surprise to the upside, but that could just be the exception that proves the rule.

ReachLocal also had the added problem of trying to go global when it didn't even have the market in its backyard nailed down.

Let us know in the comments section below or on the ReachLocal CAPS page whether you think it can reach its goals. Also add it to your watchlist to be notified of all the latest developments.

Disconnecting from growth
A dismal forecast also had investors hanging up on VoIP provider Vonage, even though the company showed third-quarter improvements. It earned $16 million, or $0.07 per share, compared with a loss of $55.4 million, or $0.26 a share, in the year-ago period. And absent one-time charges it would have made $0.10 a stub, but the market focused on its statement that the 9,000 customer defections it experienced this quarter will probably continue at the same pace until the end of next year.

Compare that with the results of 8x8 (Nasdaq: EGHT  ) , which recorded a 14% increase in revenues last month and saw its customer churn rates decline from last year. Of course, it focuses on business customers, so its clientele is different in nature from those Vonage is pursuing, but that makes it a more interesting investment too.

CAPS member thecashmen thinks consumers would just be better off using Magic Jack since it costs less than Vonage but provides essentially the same service. That view apparently coincides with much of the investment community's thinking, since just 30% of those rating the VoIP specialist think it will beat the market indexes.

Let us know in the comments section below whether you see Vonage rising above the tumult, and then add it to your watchlist to see which way it goes.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of ReachLocal. 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. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 07, 2011, at 1:18 PM, mapres wrote:

    <i>Career Education, Corinthian, Strayer Education, and other profit-making colleges have been scrutinized for ... the high debt loads of former students -- as if students graduating from other schools don't graduate with a heavy debt burden and few job prospects.</i>

    This is missing the point. The risk with for-profit education companies is that up to 80% of their income is from federal government-sponsored loans, and the government is not happy with the default rates, which are higher than with any other type of school. Thus the recent "gainful employment" rules from the Department of Education.

    This means that most US for-profit educators' stocks are in a high beta area similar to that of other companies whose business models depend on the government's largesse, such as healthcare companies that rely on Medicare reimbursement.

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