These Stocks Got All Twisted

The Dow took a shellacking after Federal Reserve Chairman Ben Bernanke said he'd continue his half-measure known as Operation Twist, a program that artificially keeps interest rates low but hurts a large number of financial institutions by encouraging borrowers to refinance at lower rates. It clears the books of banks and mortgage lenders of higher-interest loans and replaces them with others that have far less favorable terms. And a weak global economy ain't helping things, either. The Dow tumbled 250 points or 2% yesterday on the news, yet some stocks managed to do even worse and fell by even larger percentages.

Let's see whether they had good reason to drop and sit out the manic ride down, as sometimes panic-fueled declines can sometimes make for excellent buying opportunities.

Lying in the bed it made
There's little doubt as to why financial stocks like Bank of America fell by almost 4%, particularly as it has been one of the beneficiaries lately of the happy talk of massive new stimulus that would be coming -- but came up short instead -- yet the Dow's biggest loser was Alcoa, down more than 4%, as the depressing economic news coming in from around the globe indicates manufacturing will be hard hit. China's manufacturing index showed continued contraction, while the Philadelphia Fed's manufacturing index showed the East Coast was quickly heading that way as well.

While a slowing economy is certainly a macroeconomic headwind that faces any number of businesses, home-furnishings retailer Bed Bath & Beyond (Nasdaq: BBBY  ) took it on the chin because its core business is slowing and it may be facing more competition from online rivals. Shares dropped 17% on the day.

The retailer actually turned in some impressive first-quarter numbers, with revenues rising 5% to $2.2 billion and generating profits 15% higher than they were a year ago. But in yet another example of how the market is a forward-looking machine, it lambasted Bed Bath & Beyond because it merely reiterated full-year guidance while second-quarter forecasts came in below analyst expectations. There was only forecast-middling comps growth, and the pending acquisition of Cost Plus might weigh on results when it's completed.

Some analysts assert that Amazon.com (Nasdaq: AMZN  ) will prove to be a formidable threat, as it recently launched a new home-furnishings website Casa.com, but I'm not sure furniture and knick-knacks will prove as much of a sell as books and CDs did. It's also taken on a range of industries including PetSmart in pet care with Wag.com, Kimberly-Clark with Diapers.com, and Procter & Gamble (NYSE: PG  ) with Soap.com, but I'm not hearing about much traction with any of them. They might provide Amazon with some ancillary revenues, but I don't fear the competition will upset them too much. Similarly, I'm not sure Bed Bath & Beyond has to worry about Casa.com.

It produces copious amounts of free cash flow, and at 13 times its enterprise value, it's not particularly overpriced, though I'd probably like to see it in the mid-$50 share range before calling it truly undervalued. But we don't have to pick nits, as CAPS member TMFCane suggests, since it is still operationally and financially sound. Besides: "Reducing the outlook for the next Q also bodes well -- easier to outperform the outlook."

Tell me on the Bed Bath& Beyond CAPS page or in the comments section below whether you think this drop represents a good entry point, and then add its stock to the Fool's free stock tracking service to see how quickly the home-furnishings leader rebounds from this drop.

Placed in the "to file" file
It's not just dwindling economic growth that worries investors, but growth catalysts for individual companies are a concern as well. And that's what sent drugmaker Celgene (Nasdaq: CELG  ) tumbling 11.5% after it pulled its application for review of Revlimid in Europe.

Revlimid is a treatment for multiple myeloma and accounted for more than two-thirds of Celgene's first-quarter revenues, or $860 million out of the $1.3 billion in total. As the Fool's Brian Orelli pointed out, had it allowed European regulators to actually review the drug but reject it, competitors would end up discovering trade secrets when the reasons for the rejection were published. By yanking the application first, it forestalls that possibility.

But competitors were already getting a lift just from the application withdrawal. Pharmacyclics (Nasdaq: PCYC  ) , for example, bounced 4% higher yesterday in the broadly down market. It's developing an alternative to Revlimid for treatment of blood cancers like non-Hodgkin's lymphoma and chronic lymphocytic leukemia that has a similar efficacy to the therapy but fewer side effects. It's teamed up with Johnson & Johnson to begin late-stage testing later this year.

CAPS member portFoolio7, who found Celgene's depressed price a worthy entry point the day before the application withdrawal announcement, already figured that "it is a longer term play" and that "with a 17% pull back from 52wk high I can get it at the price I want." It's down a few percentage points more now, but add it to your Watchlist to be notified when it resubmits the application, and then tell me in the comments box or on the Celgene CAPS page whether you think the market's missed the bigger part of the story.

Ready for a resurrection
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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, Amazon.com, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Johnson & Johnson, Kimberly-Clark, Bed Bath & Beyond, Amazon.com, and PetSmart and creating a diagonal call position in Johnson & Johnson. 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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