Bad News Sends II-VI ... Higher?

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.


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