Why Did These Stocks Just Die?

No one should be surprised that Europe's economy really isn't fixed. The temporary fix of the Greek rescue only temporarily stopped the blood flow, and the evidence was seen in Spain's debt auction that failed miserably. But with these companies below falling even further than the markets, first let's see whether they had good reason to drop. Sometimes, panic-fueled declines can make excellent buying opportunities.

The markets fell 125 points or 1% yesterday, so stocks that went down by large percentages are still pretty big deals. Here are two stocks that fell and could provide a possibility for profit:

Stock

CAPS Rating (out of 5)

Wednesday's Change

Orchard Supply (NYSE: OSH  ) NR (11.3%)
SanDisk (Nasdaq: SNDK  ) **** (11.1%)

That's going to leave a mark
I wouldn't be too worried about the 11% drop in Orchard Supply's shares. Even though it was down another 4% in early trading, the stock was up 20% the day before on no news other than opening a new store. Hardly the kind of announcement to generate so much enthusiasm.

Spun off from floundering Sears Holdings (Nasdaq: SHLD  ) with a heavy tax burden, investors shunned the stock at its IPO and watched it nearly get cut in half. I noted at the time that investors needed to decide whether the specialty retailer could capitalize on its 80-year history, or whether it would it be more like the Villager's Hardware debacle Home Depot tried: After killing off most local hardware stores, it tried to put up a facade of being one itself. It eventually nixed the effort.

Orchard Supply largely rebounded from those depths, once again hitting its $25 IPO price and then some. And though I rated the homeowner's repair, maintenance, and improvement retailer to outperform the market on CAPS, it still does carry a lot of baggage from its prior association. As Motley Fool blogger Eric Lumsden highlights, Sears Chairman Eddie Lampert saddled it with a higher cost structure, and it's facing lackluster sales (like Sears is) just as the housing market is ready to implode yet again. But there are bright spots.

Another thing Orchard has going for them is their Orchard brand of products. They earn higher margins on these products than a lot of the products they sell, but these products were only 6% of sales in 2010. If that mix can be increased, [Orchard's] tight margins will get a little bit of oxygen. Maybe enough for a gasp. But that's what it means to be investing in a spin-off. These companies are typically lumpy and full of uncertainty, with high risk and high potential for reward.

Add the specialty retailer to your Watchlist to see how much further down the road of separation from Sears that Orchard Supply has to go to bloom.

Chipped and scraped
Unlike Orchard Supply, there was little doubt about why shares of SanDisk fell. The memory maker said it expected to generate lower revenues than it previously thought it would and that margins would be narrowed as well. Fellow memory chipmaker Micron (NYSE: MU  ) also dropped as SanDisk's announcement underscored its own muted outlook provided two weeks earlier.

Analysts speculate that the twin announcements suggest there's a big supply glut on the market, and as robust as the mobile handset niche has been, too much supply is just too much supply and prices will fall. While some say the guidance is setting up for a miss from ultrabook vendors (solid-state drive specialists like OCZ Technology (NYSE: OCZ  ) and STEC also stumbled yesterday), I have to agree with my Foolish colleague Anders Bylund, who says the market overreacted here.

The market researchers at IDC say that disk-drive shipments, which fell 4.5% in 2011 as a result of Japan's disaster and Thailand's flooding, should rebound in the second half of 2012, growing 7.2% this year and continuing to expand at a compounded 10% annual average until 2016. The key will be a shift away from consumer-oriented applications toward enterprise-level adoption. When that happens, it should kick growth into high gear.

At almost 2 times sales, SanDisk might not seem cheap, but when you see that it trades at just 8 times earnings estimates and factoring in its growth prospects, the chipmaker looks cheap indeed. I've rated SanDisk to outperform on CAPS, joining the nearly 2,000 other CAPS members who see it coming out on top.

But you can add the memory maker to the Fool's free portfolio tracker to see whether the expected sales materialize later on, or tell me in the comments section below or on the SanDisk CAPS page why my thinking on this issue isn't solid.

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 -- and it's free.

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 Home Depot. 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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