Why Did These Stocks Just Die?

The reality of the lousy jobs report issued last week couldn't be concealed no matter how hard the Bureau of Labor Statistics massages the numbers, and the Dow finally fell through the 13,000 mark. But with the following companies 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 130 points, or 1%, yesterday, so stocks that went down by larger percentages are pretty big deals. Here are two of stocks that fell that could provide a possibility for profit.

Stock

CAPS Rating (out of 5)

Monday's Change

Molina Healthcare (NYSE: MOH  ) *** (26.7%)
InterMune (Nasdaq: ITMN  ) ** (15.6%)

That's going to leave a mark
It's perfectly reasonable to expect a 22% loss in revenues and 30% in profits to generate a nearly 27% decline in market value, because the hole dug is so deep it's going to take a long time to climb out. Health insurer Molina Healthcare lost its contract with the state of Ohio -- as did Amerigroup, Centene, and Wellcare Health Plans (NYSE: WCG  ) -- in favor of Aetna and UnitedHealth Group (NYSE: UNH  ) .

While no reason for making the wholesale changes was provided, Ohio is looking to save $1.5 billion by streamlining the Medicaid program. Incumbent insurers typically win contract renewal. Centene said the decision would be negligible to its 2012 financials, but the state was central to Molina's performance. Last month, Missouri awarded its $1.1 billion contract to Centene over Molina, which is now suing the state over the loss.

The impact for Molina will reverberate outward over the next few years, because it had just added pharmacy benefits in the state, which helped contribute to the 15% increase in such revenues it recorded last year. Absent the increases and changes made to New Mexico's plan last year, Molina would have seen premium revenues rise just 4.4%. And New Mexico is key, because it's the next state the insurer has that will be deciding its contract this year.

Some 92% of the CAPS members who rated Molina expected the insurer to repeat its past performance, but now with the equation changed, I've gone and rated it to underperform for the next few years. Add in uncertainty over New Mexico now, and the likelihood of subpar performance rises dramatically. Add the insurer to your Watchlist to see whether it can somehow make up this major shortfall in revenues and profits.

A faded patina?
While the gaping hole in Molina's income statement arguably justifies the kneecapping it got, it's not so clear-cut that InterMune's haircut was equally deserved. The company admits that it's going to take longer to get its lung-scarring therapy Esbriet to market in France and Europe than it had originally planned, but it will get there, just delayed by a few quarters.

The biotech said that between summer vacations and a presidential election in France, regulators will be dragging their feet on what reimbursement should be for the drug. And since marketing is likely to come now in the fourth quarter instead of the second, Wall Street analysts have scaled back their profit expectations for the year. That, in turn, led the market to drop the stock.

But I see opportunity here, because approval and introduction to market is assured. It's a matter of timing. This isn't a case like that experienced by Sequenom (Nasdaq: SQNM  ) , after a delay of two years partially closed the window of opportunity for its Down syndrome test. Already, three biotechs have preemptively sued Sequenom in hopes of having their own tests declared as not infringing on its patents.

Although InterMune might face a competitor in Boehringer Ingelheim, some analysts don't think it will be successful in its trials. While delays are rarely beneficial, sometimes they're also not as devastating as they seem. For that reason, I'm rating InterMune to bounce back from the news and outperform the market over the next few years.

Yet more than a quarter of CAPS All-Stars rating the biotech aren't so sure and believe it won't be able to beat the Street, but you can add InterMune to the Fool's free portfolio tracker and tell us in the comments section below or on the InterMune CAPS page whether you think marketing delayed is marketing denied.

Ready for a resurrection
These health care-related stocks might be in turmoil, but there's one stock in the space The Motley Fool thinks still has legs to run even higher. Read "Discover the Next Rule-Breaking Multibagger" to find out who's breaking all the rules to become the one to make the rules. 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 UnitedHealth Group and Amerigroup. 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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