Why Did These Stocks Just Die?

Having parsed Ben Bernanke's speech within seconds of it being released, the market plunged 100 points on Friday only to rebound just as quickly when it was realized maybe what he said wasn't all that bad. It rose more than 150 points from trough to peak and finished out the day 90 points higher, a roller-coaster ride fueled by the potential of more quantitative easing.

Some companies, however, had their own problems to contend with, though the declines weren't as devastating as they otherwise might have been. So let's see whether they had good reason to drop, as sometimes panic-fueled declines can lead to excellent buying opportunities.

Company

Friday's Change

Current Price

CAPS Rating (out of 5)

Zumiez (Nasdaq: ZUMZ  ) (9.4%) $29.19 **
Limelight Networks (Nasdaq: LLNW  ) (8.0%) $2.31 ***
Facebook (Nasdaq: FB  ) (5.4%) $18.06 *

Rotten tomatoes
Investors were doing some hand-wringing over Zumiez's second-quarter earnings report after guidance came up short of analysts' expectations. I have bigger concerns than just the immediate future of the teen surf-and-skate retailer, since it is taking its concept of the niche market it operates in and is heading off in a new direction.

While Zumiez has always sold some equipment and accessories that cater to its target demographic, its June purchase of surf-and-skate equipment company Blue Tomato focuses more on the hard goods of the industry than the typical clothing lines it is used to hocking. Moreover, because Blue Tomato is based in Europe, Zumiez now will be subject to the brunt of the fiscal crisis that's bringing the continent low. I think coupled with high teen unemployment in the U.S. and a more difficult economy generally, this expansion was ill-timed and could weigh on performance for a while. I'm rating the retailer to underperform the market on Motley Fool CAPS.

Providing aid and comfort
Typically web page content is stored on a single server or is mirrored across a content delivery network. Akamai's (Nasdaq: AKAM  ) patented business model is based on a completely different way of content delivery, with just the web page stored on the server and objects embedded in the page stored on the CDN. To get the system to work, the URLs of the embedded objects have to be tagged.

Several years ago Akamai accused Limelight Networks of coordinating to violate those patents by having customers like Hulu and Netflix tag the URLs while it performed all the other steps necessary to deliver the content. Since under patent law you didn't infringe on a patent if you didn't perform all the steps yourself, Limelight was able to legally skirt culpability by having its customers perform one of the steps. The courts rejected Akamai's argument of joint infringement since Limelight's customers weren't required to tag the URLs, only that they would need to do so if they chose to use Limelight's services.

The U.S. Court of Appeals, however, threw all that into doubt last week when it said the lower courts needed to decide whether infringement occurred merely because Limelight encouraged its clients to use the patented process, saying it's akin to aiding and abetting in criminal cases when you help someone commit a crime even if you don't commit the crime yourself.

What was once thought to be settled patent law has now been cast into tumult, and because it has wide implications across many industries, particularly pharmaceuticals, drugmakers like Bristol-Myers Squibb and Pfizer backed Akamai against Google, Apple, and Facebook, which support Limelight and are facing similar suits themselves.

Share with us in the comments section below whether you think Limelight infringed on Akamai's patents by encouraging its customers to add the missing piece to the puzzle.

An about-face
Speaking of Facebook, did I switch horses midstream too soon? Last week I said the social network's stock looked attractive below $20 a share and short sellers might be piling on in the misguided belief that slowing revenue growth was fatal. With its massive user base and growth still rising at double-digit rates, Facebook deserved more credit for its business than it was being given. I switched my underperform rating on CAPS to outperform.

Facebook promptly dropped again after several brokerage firms cut their price targets on the social network site. The problem is there are more lock-up expirations over the next six months, and the selling pressure will weigh on current shares outstanding. Yet it's noteworthy that even the analysts think the markets will return to considering the business's fundamentals after that, so I'd consider the weakness being experienced an opportunity to get in on what should be a fairly steady performer in the years to come.

Of course, that means there will be volatility in the meantime, and some stocks like Zynga (Nasdaq: ZNGA  ) , which rely upon Facebook for their own sustenance, will be caught up in the turbulence. The online game company's stock also dropped on Friday, falling 3% on the news.

Tell me if I was premature in thinking Facebook had absorbed the worst of what the shorts could throw at it -- leave a comment below.

Ready for a resurrection
Social-media stocks have turned out to be way less than meets the eye, but for even more on whether they might be worthy of a spot in your portfolio -- or not -- grab yourself a copy of brand-new premium research reports on Zynga and Facebook. You'll also get free updates for a year as they report earnings and other developments in their businesses occur. Sign up for your copy today.

Fool contributor Rich Duprey owns shares of Pfizer and Apple, 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 Facebook, Netflix, and Apple. Motley Fool newsletter services have recommended buying shares of Netflix, Facebook, Google, Apple, and Zumiez. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and a bear put ladder position in Netflix. 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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