Bad Economic News Can't Stop These Stocks

Corporate earnings and continued doubt about Europe's finances helped wipe out the Dow yesterday, which tumbled 83 points after having started off the day in positive territory. Yet some companies managed to do even worse and plunged lower by double-digit percentages.

But let's see whether they had good reason to drop; panic-fueled declines can sometimes make for excellent buying opportunities.

Company

Yesterday's % Change

Price

CAPS Rating (out of 5)

MAKO Surgical (Nasdaq: MAKO  ) (43.1%) $14.01 *****
James River Coal (Nasdaq: JRCC  ) (24.7%) $2.16 **
Questcor Pharmaceuticals (Nasdaq: QCOR  ) (21.8%) $45.07 ***
Beazer Homes (NYSE: BZH  ) (11.8%) $2.98 *
Advanced Micro Devices (NYSE: AMD  ) (11.2%) $4.99 **

Building a bridge to nowhere
Count me among the skeptics who don't believe the housing industry is on the cusp of a recovery yet. Homebuilders might want to use that theory as justification for raising cash, as Beazer Homes did yesterday, but there are simply too many problems in the marketplace to suggest homebuying is going to take off. Beazer said it will sell $75 million in stock and 3 million equity units made up of a prepaid stock purchase contract and an unsecured senior note due in 2015. Hovnanian's already been out there raising cash and KB Homes is expected to move next. I'd use any bounce in a builder's price to bet against it. Unless and until the economy improves, housing will only see the occasional bright spot amid storm clouds of gloom.

So deep it's a gouge
Chip maker Advanced Micro Devices was one of those tech stocks that took down the Dow, reporting revenue and earnings forecasts that showed dismal expectations of PC sales. Along with other tech heavyweights like Applied Materials that offered up gloomy prospects of weak foundry demand, the tech sector was the albatross around the market's neck.

Caught by the short hairs
Noted short-seller Citron Research has often published spot-on attacks on sham outfits, particularly Chinese reverse-takeover stocks, but analysts said the report it issued on Questcor Pharmaceuticals that caused the company to lose a fifth of its value wasn't the best work it's published. The allegations leveled against the pharma's drug, Acthar, were old and misleading, according to the analysts at Jefferies Group. Citron doesn't often shoot blanks, but with Acthar's June sales soaring, I expect we'll see a lot of the lost ground recovered.

Between a rock and a hard place
Last month Standard & Poor's downgraded the credit rating of coal miner James River Coal as industry conditions worsened. And worsen they did. Amid a stalling global economic recovery, weakening demand for met coal, and cheap domestic natural gas prices making utilities switch to the cleaner-burning fuel, Patriot Coal filed for bankruptcy protection. With James River's own finances in doubt, the market pummeled the coal miner, expecting that it will be the next to succumb to the all-out assault being waged against it. Keep an eye on whether this development leads to a domino effect or if it proves to be a rallying point for coal.

Keep swimming or die
Management is fond of pointing to timing issues when it comes to explaining away a fall off in sales, but investors can clue in to the veracity of such statements by checking out how strong the guidance is they offer for next month. If demand is truly strong and temporary ordering issues from customers are really at the heart of the matter, then the next quarter's results should enjoy the benefit of the extra sales falling into its range. But if guidance remains the same or comes in even weaker, than having a dim view of management's explanation is probably the right course of action.

Which is where we find MAKO Surgical, the manufacturer of orthopedic surgical systems, who blamed timing problems for a lousy quarter but didn't up next quarter's guidance. As a result, it seems that sales are falling more because of a lack of demand than not enough days in the quarter.

The huge sell-off in MAKO's stock certainly makes it appear to be a tempting way to play on an overreaction by the market, but this might not be an overreaction after all. It looks more like a business that has some serious issues facing it. One quarter of disappointing sales can be forgiven, but when a company racks up several in a row -- as MAKO has -- then investors need to be more circumspect in their selections.

It's been down this road before, and I'm not closing out my outperform rating on CAPS just yet, but I'm also not sure I'd be racing in to buy just yet, either. Companies are like sharks -- they have to keep swimming forward or they die. MAKO needs to bounce back here, although investors like CAPS member arembr01 believes there are times you need to cut and run: "After the second round of coming up short, I think I'm going to cut my losses and walk away."

Tell me on the MAKO Surgical CAPS page or in the comments section below whether you agree it can still beat the Street or, like me, think it's just a matter of time before it crashes and burns.

Ready for a resurrection
While the landscape is always changing for health care stocks like MAKO, the real upheaval could come after the November presidential elections. The Motley Fool has identified a handful of stocks that may just be the best beneficiaries, whichever way the results go. Download your copy of "These Stocks Could Skyrocket After the 2012 Presidential Election" now, because the report won't be around too long.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of MAKO Surgical. Motley Fool newsletter services have recommended buying shares of MAKO Surgical. The Motley Fool has a disclosure policy. We Fools may not 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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  • Report this Comment On July 11, 2012, at 8:00 PM, kel4003 wrote:

    Thanks for the thoughtful article Rich, I am writing this from the perspective of a new fool this year who thought he was being clever buying 27.50 calls on Mako when it was @ 25, and then doubling down when it hit about 24 thinking for sure that Mako would soon pop since other fool stocks Like WPRT and NFLX recently did. I would then buy shares with the profits and protect them with puts. Wishful thinking.

    I thought sales would increase, perhaps not substantially, but enough to warrant enough investor confidence in this great long term play where its understood that that could mean years til it pays off. Obviously that didnt happen and after earnings day I watched my entire investment go worthless before I could even load the option chain on my broker site.

    All that aside, I am somewhat surprised that so many look to Mako as a sure fire boomer stock with the potential to last for decades, But they fully expect a rapid linear climb in share price starting now and lasting years, or else they instantly go short. To me that seems to go completely against the grain of what Mako is all about.

    The bigger question in my mind is if this company can survive all the time it takes for its "Razors and blades" model to become profitable.

    And I really wonder why it even got described that way when as far as I know you would want to practically give the initial product away to gain the more lucrative maintenence contracts, but all Ive ever heard is how freakin expensive the Mako system is compared to conventional knee replacements.

    I am concerned also that the hard reality of how few people have saved enough for retirement might not make the boomer market as cherry as one might like to think. Innovation sells. But it takes economical Innovation to make a truly game changing product. It has to be within the reach of the masses, better, and cheaper. I'm doubtful Mako wants to lower thier price on units, but I'm sure that would increase sales numbers.

    I wish I had the patience to just buy and hold.

    Look forward to more articles!

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