Why Did My Stock Just Die?

Better import and export trade data helped the Dow Jones Industrial Average close in on the 14,000-point threshold at the end of the week, letting the index close on a high note. But international trade imbalances had little impact on the companies below, which were among the more notable ones going in the opposite direction and leading the way down.

Company

Percentage Change

Nuance Communications (NASDAQ: NUAN  )

(18.5%)

Riverbed Technology (NASDAQ: RVBD  )

(17.6%)

Roundy's (NYSE: RNDY  )

(7.9%)

Now don't go running over the cliff like a lemming; it could just be a temporary situation. Let's first see whether they had good reason to fall, as panic-fueled routs can sometimes lead to excellent buying opportunities.

Finessing a difficult terrain
I've been leery of the investment thesis for Nuance Communications for some time because of its heavy reliance upon growth by acquisition. I've noted it's never a problem until it's a problem, and though the speech-recognition leader laid partial blame for its big earnings hiccup on delays in waiting for Microsoft's new operating system to be unveiled, it also noted lower future PC sales would likely weigh on results, too. All this scrambling for more companies to buy up seems to have blinded it to tending to the business at hand.

Transcription service volumes dropped as electronic medical record-keeping was more widely implemented, which at least had the effect of seeing more of its Dragon Medical speech-to-text software installed. But with Europe going through another recession, businesses have largely put on hold any spending plans contributing to the decline. Worse for investors, though, was the dour guidance for the year, which came in below analyst expectations as well.

Nuance's P/E ratio is still twice what analyst estimates' are for its long-term growth prospects, making it seem expensive, particularly as it needs to churn through the integration phase of its acquisitions. I see more indigestion in Nuance's future.

A suboptimal performance
Riverbed Technology also got crushed because it came up short of analyst expectations last week as investors feared its WAN optimization business is operating at optimal levels. Like Nuance, the network optimization specialist had profits crimped because of acquisitions and forecasts of future growth lower than what Wall Street wanted.

In contrast to Nuance, I like Riverbed's prospects -- even if it seems the riverbed of opportunity has run dry. As I noted last fall, 2012 was recognized as a transition year for the company and it is only just emerging from the product switch-out it began last year. I would've preferred seeing a bit of traction being gained in the fourth quarter, but 2013 was the year I thought Riverbed had real chance of gaining momentum.

Also like Nuance, it carries a rich valuation when you compare its P/E to growth, but with its enterprise value trading at 12 times its free cash flow, I find it a much better value than Nuance, whose EV goes off at more than 16 times its FCF.

In the slow checkout lane
Supermarket chain Roundy's fell on Friday for no company-specific reason, but it will announce its quarterly results at the end of the month. That's not likely enough to offer much encouragement for investors who've had to suffer through poor performance before since it went public exactly one year ago. Last quarter, sales fell and profits plunged by more than a third because of the sluggish economy and a heightened level of promotions -- not all of which were successful -- as it fought off growing competition from big-box rivals. It ended up having to cut its dividend by more than half from $0.23 a share down to $0.12 to maintain its financial flexibility, a situation I noted was a real possibility.

Roundy's private equity owners piled debt on the grocery chain to pay themselves a dividend because they've been unable to sell off the company and get out of their investment. With earnings approaching again, I'm not hopeful we'll see anything better this time around, either.

Ready for a resurrection?
Speech recognition is yet another nascent technology set to explode with the rise of tablets and smartphones, and no company is better poised to benefit from this coming boom than Nuance Communications. However, this growth story doesn't come without risks, too. The Motley Fool recently published a premium research report to break down what investors interested in Nuance absolutely have to understand before investing, so click here now to grab your copy today.


Read/Post Comments (3) | Recommend This Article (7)

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  • Report this Comment On February 13, 2013, at 8:42 PM, pmeyer01 wrote:

    I'm so confused, you just recommended us to buy NUAN 6 weeks ago, and now that it has dropped 18.5% you're saying it's overpriced with a P/E twice what it should be and that you've been leery of investing in it??

  • Report this Comment On February 14, 2013, at 9:51 AM, TD25C wrote:

    I have bought into mf a few times and everytime i buy what they recommend i lose my but. the worst part is they always seem to recommend things that cost in the 20 dollar range and above, most people cant afford very many shares at those prices so the gain is terrible if it does go up but when it drops 5 pointswhen i can only afford 200 shares it is an awful loss I think I am at the point to tell mf to stick it for the last time

  • Report this Comment On February 14, 2013, at 10:06 AM, TD25C wrote:

    need to add to this. had 2750 shares of pal that mf said was not a good stock. so i sold it at 1.76 and bought nuan that was highly written up as a great stock. pal went up .20 cents that would have been a gain of 1000 dollars bought 200 shares of nuan with that money and it went down 5 dollars so lost over1000 on nuan and lost another 1000 because sold pal so thanks alot mf for losing me 2000 on your recommendation

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