Why Shares of RCS Capital Tanked Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of RCS Capital (NYSE: NSM) fell as much as 12% after the brokerage firm announced disappointing fourth-quarter results and issued less than uplifting guidance for the current year.

So what: The following table summarizes RCS Capital's "misses" with regard to the fourth quarter and its full-year guidance for 2015:

Sources: Thomson Financial Network, RCS Capital.

(Note, though, that the term "consensus estimate" is a bit misleading for a company with low following on Wall Street -- only two analysts are publishing estimates for RCS Capital.)

Today's earnings and guidance miss is a bit of a sideshow compared to the serious governance concerns that affect RCS Capital. As The Wall Street Journal explained:

RCS Capital was until recently one of dozens of real estate companies headed by investor Nicholas Schorsch. Another one of Mr. Schorsch's companies, American Realty Capital Properties, revealed in October that it had misstated financial results in the first quarter of last year and covered it up with another misstatement in the second quarter. ... Mr. Schorsch until recently was hailed as an innovator in REITs, setting up dozens of small real-estate funds with similar-sounding names, collecting money from investors and buying properties at a frenetic pace. He specialized in selling the properties quickly, often to his publicly traded companies.

Now what: Shares of RCS Capital are down by three-fourths from the 52-week high they put in last April. Due to the governance issues that continue to cast a shadow over the company, this is the sort of stock that can offer an opportunity for substantial upside if management addresses these matters aggressively and there aren't any skeletons in the closet (or not too many of them, at any rate.) However, "can" is the operative word here, and the possibility of further, permanent impairments of capital is also genuine.

As a rule, I would discourage individual investors from putting money into these kinds of situations, as they require significant initial due diligence, as well as careful ongoing monitoring. For nonprofessionals, bottom-fishing for small, scandal-tainted companies is a poor use of limited time and resources; I see no reason to stray from this advice in the case of RCS Capital.