These Stocks Couldn't Beat the Blue Chips

Earnings of blue chip stocks drove the Dow higher earlier last week, as did a surprising housing report that showed homebuilders began shoveling more new homes than any time in the past few years. While I don't necessarily find that encouraging, some companies had their own problems to contend with and managed to go in the other direction, some even plunging by double-digit percentages.

So let's see whether they had good reason to drop, as sometimes panic-fueled declines can lead to excellent buying opportunities.

Company

Wednesday's % Change

Price

CAPS Rating (out of 5)

Rovi (Nasdaq: ROVI  ) (43.3%) $10.01 **
New Oriental Education (NYSE: EDU  ) (35%) $9.50 *
Arena Pharmaceuticals (Nasdaq: ARNA  ) (9.7%) $9.98 **

Earnings, fraud allegations, and competition were the reasons behind the midweek grinding these stocks took.

Scrambled signals
Interactive-channel-guide software provider Rovi got its programming mixed up after it said demand in the consumer electronics market is harder to find than water in the desert. Revenues, which it previously pegged at $785 million for the full year, were slashed by a third to $680 million in its new guidance as it hasn't been able to sign up new licensees for its technology that allows viewers to browse TV program listings. Current customers were also unwilling to sign on again, at least not on terms acceptable to Rovi. Losses are also expected to widen for the second quarter, growing from $0.06 per share to $0.18.

Rovi's been fighting Mitsubishi, LG Electronics, and Vizio over their alleged patent infringement of on-screen guides and its V-chip technology that restricts access to certain shows or networks deemed inappropriate. It's also battling Netflix and Roku before the U.S. International Trade Commission.

Some investors have paired the news of Rovi's problems with those at sound specialist DTS (Nasdaq: DTSI  ) , which also found demand wanting in consumer electronics, to predict a general malaise in the sector. Considering the faltering economy, no doubt there is extreme weakness, but Rovi and DTS are facing very company-specific issues: a patent challenge and slack Blu-ray player sales. That might not necessarily translate beyond those narrow confines.

A real dunce
For New Oriental Education, it seems like the good ol' days of last year when dozens of Chinese reverse merger stocks were accused of fraud. Muddy Waters, which was one of the prime short sellers leading the charge against the pack, came out with a report questioning its business practices. Coming as it does the day after the provider of English-language training and standardized test prep for Chinese youth revealed the SEC was investigating it -- leading to a nearly identical drop in its stock -- it amounted to a one-two punch for investors.

The Muddy Waters report charges New Oriental with lying about not having franchisees. The say it actually has scads of them, which allows it to improperly "inflate its cash balances in order to receive unqualified audit opinions from its auditor."

Investors might have thought that by this point the dreck of Chinese stocks had been cleared out, but if the allegations and investigations pan out, it's obvious caution is still needed -- though due diligence is always required before you sink your money in. Let me know in the comments section below whether the tag-team duo of SEC investigations and charges of fraud by Muddy Waters has shaken your confidence in Chinese stocks again.

Phat chance
I'll admit to some surprise that Arena Pharmaceuticals dropped as it did on news of the FDA's approval of rival anti-obesity drug Qsymia (formerly known as Qnexa). This is news? The market didn't anticipate that VIVUS (Nasdaq: VVUS  ) would be first-to-market? Maybe it was just the reality of having the news settle in.

While Qsymia will be ahead of Arena's Belviq (who comes up with these names?), the few months' lead time might not really give VIVUS an advantage, since it does come with some labeling limitations (although so does Belviq). Yet as the Fool's Brian Orelli notes, it's going to be a while anyway before one can be declared a winner over the other:

"The question becomes whether Belviq's cleaner side-effect profile and potentially stronger marketing muscle can overcome Qsymia's better weight loss. Assuming most patients aren't covered by insurance, the cost of the drugs could be the deciding factor."

While I figured some of the euphoria would wear off on Arena's own approval (we still need to wait for drug scheduling, which is the reason for its delay to market), I think there's still monster potential here, and I'll be trading my underperform rating of the pharma upstart to an outperform. There's a big enough opportunity in obesity for several companies to succeed.

Tell me on the Arena Pharmaceuticals CAPS page or in the comments box below whether you think the stock has pulled back enough to warrant an entry into it at this time.

Ready for a resurrection
Health-care investors are always looking for the next big drug breakthrough like Belviq and Qsymia, and Motley Fool co-founder David Gardner recently identified one small-cap health-care company he believes is poised for monster returns. To uncover this top pick today, enjoy the special free report: "Discover the Next Rule-Breaking Multibagger." Don't miss out on this limited-time offer and your opportunity to discover this game-changing company before the market does. Access your report -- it's totally 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 Netflix. Motley Fool newsletter services have recommended buying shares of New Oriental Education and Netflix. 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. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2012, at 9:08 PM, genesis667 wrote:

    I would get in ARNA sooner rather than later....If J&J files for an injunction against VVUS, ARNA should move up fast.....I doubt Johnson is going to sit idly by and allow VVUS to infringe on their patent....

  • Report this Comment On July 23, 2012, at 1:07 AM, chilawyer wrote:

    You have no idea what J&J is going to do.

    VVUS is a J&J customer, a fact overlooked by the scaremongering shorts.

    Despite long-standing awareness of VVUS' patent, J&J has not sent any communication to VVUS claiming any infringement.

    J&J is much more likely to joint venture or purchase Qsymia outright after its public use demonstrates its efficacy and popularity over competing drugs.

  • Report this Comment On July 23, 2012, at 4:42 AM, Daedalus43 wrote:

    I don't think J&J would've wasted time when it wasn't a sure thing for Qsymia to get approved? Patent protection or not, VVUS just opened up the opportunity for doctors to prescribe phentermine (which used to be contraindicated to be tried in combination with anything) with the much safer Belviq. This will more than wipe out any weight loss advantage of phentermine with Topamax that the medically-challenged media & Wall Streeters keep citing.

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