Why Did These 3 Stocks Just Die?

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.

Company

Yesterday's % Chg.

Current Price

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 ***

Source: FinViz.

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
Retail may look like a wasteland here and abroad, but The Motley Fool has found one international retailer that may stand that notion on its head. Find out which stock was so promising it was one of the Fool's top picks for 2012. You can access the report free of charge by downloading it here.

Fool contributor Rich Duprey owns shares of Aeropostale, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Guess?, International Business Machines, and Aeropostale. Motley Fool newsletter services have recommended buying shares of Accenture and Guess?. Motley Fool newsletter services have recommended writing covered calls on Guess? and creating a synthetic long position in International Business Machines. 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 August 24, 2012, at 6:07 PM, gigabob635 wrote:

    HP and Comeback are two words I expect to see in the same sentence in a science fiction story - not in anything in the financial press. They may have won the lawsuit with Oracle - who hasn't lately (I may apply for a job as a corporate attorney - even my lack of experience should be better than they have now) - but their high end Unix Integrity server is mortally wounded - about where Kodak's film business was a decade ago. PC's will be lucky to return 5% gross margins - and consume 30% of management time and capital resources. HP has no tablet or phone business - and shot the software they might have made some money on. Even if they do a tablet - it will be in a razor thin device market where HP is not going to build a better widget than Samsung, HTC, ASUS, Compal - not to mention Microsoft, Google, Apple and Amazon. An HP "innovation" in the server space is to replace x86 and Itanium servers with ARM devices and sell them super cheap. Uh guys, not a winner. If successful it will probably first cannibalize HP's own x86 servers - going from 20% margin to 10% margin devices, and inviting a horde of Taiwanese competitors. Not the path to future profits.

    What about services - the $8B impairment charge should speak for itself and the $10B Autonomy disaster is another $10B impairment charge waiting in the wings.

    With the rapid transition to cloud the action is in the backend (Servers and Services) and the front-end (Tablets and Phones). With no device strategy and a focus on commoditizing its server strengths that leaves HP Global cloud services which, when people point too harsh a finger at as the future of growth and profit - it seems to get a reset from management on how soon before major results show up on the bottom line - reminds me of Fusion.

    Unfortunately - if you can see through this cloudy forecast - it probably means HP's future cloud services play has evaporated as well.

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