Great Wolf Not So Great

Disappointment has a funny way of sneaking up behind you, bumping you behind the knees, and scrambling away as you hit the ground. I'm a shareholder in Great Wolf Resorts (Nasdaq: WOLF  ) , and that's pretty much what happened to me last week. The young leader in hotels with massive indoor water parks announced that a dreadful start to its key summer season meant that it was likely to miss its targets for the rest of the year. This came on the heels of warning back in June that it would post a loss of $0.03 a share for its second quarter.

The kicker here is that the quarter came in far worse than that. The company wound up losing $0.08 a share for the period as occupancy rates were down throughout the hotelier's lodges. It's not every day that you see a company disappoint investors twice over the same quarter.

It gets worse, though. Two days earlier, A.G. Edwards put out a sell rating on the stock. I'm usually suspicious when analysts make a radical move so close to an earnings announcement. What do they know? Did somebody tip them off? I admit I was caught off guard here. I figured the company had already warned back in June and that it would have spoken up again if it its watered-down projections were overly ambitious. I had also seen cases like an analyst downgrading Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) just before they went on to zoom past Wall Street's bottom-line expectations.

I shouldn't have let my guard down. The folks at A.G. Edwards clearly did their homework this time. Maybe they were scouting out the various locations and came to the logical conclusion that bookings were off this summer. Once A.G. Edwards issued the sell recommendation so close to the company's earnings report, though, Great Wolf should have come clean and broken the bad news to everyone ahead of the actual earnings report on Thursday morning.

So how can you trust management here? This company just went public in December and it has already alienated investors and soiled its publicly traded reputation. Those stains don't exactly come off in the wash. The company is going to spend a lot of time to win that kind of confidence back -- or bite the bullet right away and bring in new management that can distance itself from this poorly executed mess.

What makes this even more bothersome is that earlier this year, I singled out the stock as a worthy investment for our Motley Fool Rule Breakers newsletter. It's not the first call that hasn't exactly panned out for the research service's subscribers. Past picks like Taser Systems (Nasdaq: TASR  ) and BioSante Pharmaceuticals (AMEX: BPA  ) have also taken their lumps.

Still, because 13 of the other 19 stocks have produced double-digit returns since being featured in the newsletter, the average return of all 22 selections since Rule Breakers' launch last October is a hearty 12%. That's more than twice the market's return in that time. You may want to check out some of those winners if you want to cheer yourself up.

As for Great Wolf, it may be in for a rough patch the next time it needs to raise money to fund new resorts. This is one Wolf that bit the hand that fed it -- and then kept gnawing at it like a soup bone. That's a pity because indoor water parks remain all the rage and Great Wolf seemed to have the right stuff to make it happen in this promising niche in the otherwise sleepy lodging industry.

Checking in? Why not check out these other related reads?

Longtime Fool contributor Rick Munarriz loves his water parks. He does own shares in Great Wolf. Yes, it hurts.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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