The Fed gave off mixed signals about dumping even more money into the economy as unemployment claims rose just as new home sales flatlined (don't look at the headline number, read the real data showing non-seasonally adjusted numbers). This didn't lend itself to a very bright economic picture, and the market turned tail, with the Dow falling 115 points, or almost 1%.
Some companies, however, had their own problems to contend with, some plunging by double-digit percentages even. So let's see whether they had good reason to drop, as sometimes panic-fueled declines can lead to excellent buying opportunities.
Yesterday's % Chg.
CAPS Rating (out of 5)
|Guess? (NYSE: GES )||(22.6%)||$25.95||****|
|International Rectifier (NYSE: IRF )||(11.9%)||$16.29||**|
|Hewlett-Packard (NYSE: HPQ )||(8.2%)||$17.64||***|
It was all earnings-related, though, for these three losers, as worse-than-expected performances -- and in the case of Guess? and International Rectifier, outlooks -- suggest things aren't getting any better. For Hewlett-Packard, it underscored the long-standing belief that big acquisitions rarely go as planned and usually end up causing more indigestion than they're worth.
A bad case of indigestion
Four years ago, computing giant HP bought technology services specialist Electronic Data Systems in a $14 billion buyout in an effort to overtake Accenture (NYSE: ACN ) and put it within striking distance of IBM (NYSE: IBM ) in the worldwide IT market. The Fool's Rich Smith warned at the time that HP wasn't buying value, but rather a value trap, and yesterday it took an $8 billion noncash pre-tax goodwill impairment charge related to the acquisition. Hewlett-Packard went from reporting earnings of $0.93 per share last year to a massive $4.49-per-share loss this time around.
If the rest of the business was performing well, maybe you could forgive it for the misstep, but there have been a string of stumbles for the computer maker, and revenues fell 5% in the quarter as the PC business withers away. With CEO Meg Whitman admitting the company is in the midst of a "multi-year turnaround," there's no reason to expect it will be able to change course anytime soon.
Motley Fool CAPS member warrenout says we're witnessing a decline brought on by the "slow death of the desktop PC," but I tend to think it's more systemic than that. Whitman's got a large hole to fill and I'm not expecting her to record any successes for some time, so I'm following warrenout in rating Hewlett-Packard to underperform the broad market averages on CAPS.
But you can tell me in the comments section below if you think the tech giant will be able to bring this sinking ship back to port sooner rather than later.
Not rectifying the situation
The $69 million goodwill impairment charge International Rectifier took obviously wasn't anywhere near the size of Hewlett-Packard's, but the results were the same nonetheless, causing the power-management-chip maker to report losses that widened significantly sequentially and turned an operating profit a year ago into an operating loss this time around.
To deal with the slowdown in its end markets, which include computers and cars, IR is closing down one of its facilities and writing off the inventory there. Revenues slid 15% in the fourth quarter and gross margins crumbled, falling to 25.9% from 29.8% in the third quarter and 37.2% a year ago. While it wants to point out how well it's executing on new product introductions, if its customers don't want what it's currently selling, there seems little reason to expect they'll want the new stuff either.
There's way too much uncertainty surrounding International Rectifier's business now for investors to consider buying into this stock, particularly with guidance coming in below expectations, but if you think differently let me know below.
A threadbare opportunity
Diminished expectations also did in clothing retailer Guess?, which forecast revenues of between $2.62 billion and $2.65 billion, below Wall Street's consensus view of $2.7 billion. It also significantly reined in profit estimates, slashing full-year guidance by double-digit percentages to $2.15- $2.30 per share.
The retail market is in a difficult position these days as a lackluster economy at home coupled with dire financial consequences abroad provide few opportunities to find growth niches. Aeropostale recently chimed in with a dour outlook, suggesting third-quarter earnings would be a big disappointment, almost as much as its second-quarter results turned out to be, as it barely broke even. The back-to-school season is off to a dismal start and we could see more retailers begin to unravel soon.
I have a longstanding outperform rating on Guess?, and it may be time to revisit the investment thesis there.
Ready for a resurrection
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