Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Bad News Sends II-VI ... Higher?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

This article is part of our Rising Star Portfolios series.

Little II-VI (Nasdaq: IIVI  ) has been the worst performer so far in my real-money, Rising Star portfolio: My two positions have lost 25% and 35%, respectively.

When management updated investors on some bad news this week and lowered earnings guidance, it looked as if the stock would be heading lower. Instead, it rallied 11%. Why?

A flood of news
The news quantified the impact of the severe flooding in Thailand earlier this year that shut down one of II-VI's suppliers. The Fabrinet (NYSE: FN  ) plant located in Pathum Thani not only makes components the company uses, but it also sells products using II-VI components to other businesses. A double-whammy, if you will.

We now know this plant will be closed at least until 2012, and Fabrinet says it may never reopen at that location. II-VI says the related expenses will total about $0.01 to $0.02 per share in the current second quarter.

What's more, the company's Pacific Rare Specialty Metals & Chemicals subsidiary is seeing a "significant decline" in the market price for tellurium, which will probably lead to an inventory writedown of about $0.03 per share.

Management is now predicting second-quarter revenue in the range of$127 million to $129 million, and EPS of $0.17 to $0.19. For fiscal 2012, ending June 30, the guidance is for $550 million to $560 million in revenue and $1.05 to $1.10 in EPS. Compared with previous guidance, we're looking at about a 5% hit to revenue and a 17% to 36% drop in EPS.

Bullish bad news
With all this bad news, why did the stock spike 11%? Well, there's always the old saw that the market hates uncertainty, and when uncertainty clears up, stocks normally benefit. Investors now have a much clearer idea how Thailand will affect II-VI. It also helped that the market was feeling its oats yesterday on good news from Europe.

II-VI Stock Chart

II-VI Stock Chart by YCharts

Now what?
II-VI has taken us on a crazy ride, with wild swings both up and down. I expect more volatility in the future, but I'm trying to stay focused on the long term. There's quality competition out there from Cree (Nasdaq: CREE  ) , Northrop Grumman (NYSE: NOC  ) , Goodrich (NYSE: GR  ) , and Dow Corning -- a jointly owned subsidiary of the deep-pocketed Dow Chemical (NYSE: DOW  ) and Corning (NYSE: GLW  ) .

However, as my buy report explains, II-VI has high barriers to entry; a sound, proven, long-term business model; and the possibility for strong growth in its target markets. I think current prices provide a good entry point -- so much so that I'm also making a CAPScall by giving the stock a green thumbs-up in my CAPS account.

Fool analyst Rex Moore runs a real-money, Rising Star portfolio based on his screens. Keep up with the festivities on Twitter. Rex owns no companies mentioned in this article. The Motley Fool owns shares of II-VI and Northrop Grumman. Motley Fool newsletter services have recommended buying shares of Corning and II-VI. 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.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1746987, ~/Articles/ArticleHandler.aspx, 10/27/2016 10:50:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,177.69 -21.64 -0.12%
S&P 500 2,134.53 -4.90 -0.23%
NASD 5,240.99 -9.28 -0.18%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 10:33 AM
CREE $22.94 Up +0.21 +0.92%
Cree CAPS Rating: ***
DOW $54.80 Up +1.04 +1.93%
The Dow Chemical C… CAPS Rating: ****
FN $42.35 Down -1.22 -2.79%
Fabrinet CAPS Rating: ***
GLW $22.96 Down -0.06 -0.26%
Corning CAPS Rating: *****
GR.DL $0.00 Down +0.00 +0.00%
Goodrich Corp CAPS Rating: ****
IIVI $27.15 Up +0.50 +1.89%
II-VI CAPS Rating: *****
NOC $225.22 Down -2.83 -1.24%
Northrop Grumman CAPS Rating: ****