Why Did My Stock Just Die?

The market managed to eke out a win on Friday, ending a string of consecutive down days. But with these companies going in the other direction, first let's see whether they had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities.

The markets rose 34 points to close out the week, so stocks that went down by large percentages are still pretty big deals. Here are two of stocks that fell that could provide a possibility for profit:

Stock

CAPS Rating (out of 5)

Friday's Change

KB Home (NYSE: KBH  ) * (8.5%)
Wet Seal (Nasdaq: WTSLA  ) *** (7.6%)

That's going to leave a mark
Since it's the second straight month that the number of new homes for sale has been at 150,000, maybe they'll tell us the housing market has really bottomed this time. Mind you, that is the fewest ever since they started keeping track in 1963. And for those that are on the market, sales fell 1.6% from the month before, compared with an expected gain of 1.3%. Worse, last month's numbers were revised down from a small 0.9% decline to a whopping 5.4% drop!

And if you need more proof that housing's woes are not over, look no further than Bank of America (NYSE: BAC  ) offering to rent you your home rather than foreclose on it. Just turn the title over to them, and you can stay put and pay them rent. That only means they're unable to sell the houses they've already taken and now are sitting on their balance sheets draining cash.

Enter KB Home with a further bucket of cold water. Orders for new homes fell 8%, with cancellations soaring to 36%. While higher prices helped push its revenues up 28% in the quarter, it was still much worse than what analysts were expecting.

Earlier this year I warned that despite the bounce, KB, Toll Brothers, and other homebuilders enjoyed following news that the market was turning, it was premature to really believe it had turned the corner. There were a lot of other factors involved in the positive reports being issued, such as Fannie Mae and Freddie Mac's initiation of a foreclosure moratorium for the holidays. It was only a matter of time before the weakness reared its head again.

At the time, I rated Hovnanian (NYSE: HOV  ) to underperform the market indexes, because it had received one of the biggest bounces, but I should have rated all the homebuilders that way. I'll do so now and start with KB Home.

CAPS member MHenage looks at the cash KB has on hand and considers how long the housing market has to go and doesn't see the two meeting up.

Negative cash flow to the tune of $322 mil last 4 quarters. The company has about $606 mil. in cash and investments. This gives less than 2 years for the company to turn cash flow positive. I don't see the housing market recovering that fast. I think KBH disappears.

Add the homebuilder to your Watchlist and then let us know in the comments box below or on the KB Home CAPS page whether it and the other builders are in for many more dark days.

Running on empty?
Home-sales numbers were lousy to be sure, but economist and market strategist David Rosenberg said 11 of 13 economic indicators have missed expectations recently, and when you consider all the gymnastics that go into reporting jobs and auto-sales numbers, we're probably looking at a complete wash.

With that backdrop, it may be difficult to convince consumers to pay full price for retail fashions. Even as the unseasonably warm weather has retailers thinking about summer, let alone spring, gloomy economic news will challenge even the better-positioned clothiers. Unfortunately for Wet Seal, it isn't one of them. Earlier this month, it posted same-store sales for February that were down 5.8% while others such as The Limited (NYSE: LTD  ) and Buckle rose 8% and almost 15%, respectively.

Wet Seal followed that up with an earnings report that showed revenues and profits falling sharply from last year. Quarterly sales were down 1.4%, but earnings were down more than 57%. While that latter number might have been in line with analyst expectations, it suggests a deteriorating situation.

Still, 86% of the 225 CAPS members rating the retailer think it can do better going forward, so add Wet Seal to the Fool's free portfolio tracker and tell us on the Wet Seal CAPS page whether you think it will continue to unravel.

Ready for a resurrection
Just because your stock has taken a beating, that doesn't mean it's going to roll over and die. Markets are known for overreacting. Balance out the extremes by finding companies the will help you build a solid retirement portfolio. You can find them in The Motley Fool's report, "3 Stocks That Will Help You Retire Rich." This is a special free report that you can access right now -- it's free.

Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Bank of America. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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