5 Stocks in a Tailspin

Individual stocks can surge 10%, 25%, or even higher in a short period of time. And they can fall just as far, just as quickly. Perfect example -- Solarfun Power (Nasdaq: SOLF  ) has been soaring lately along with other solar peers. Valuation concerns nearly wiped out the week's gains in a single day, though, as the stock dropped more than 22% yesterday.

Big drops in share price can signal material defects or new risk, but at other times, they're simply pullbacks after a long run-up. Fortunately, we have Motley Fool CAPS, a great resource to help us understand the larger picture behind big price drops.

Is the sky falling?
CAPS contains more than just the crowd's opinions. Its best-performing investors' opinions count more in shaping each company's rating than do the picks of their poorer-performing peers. That way, investors can intelligently use the collective wisdom of more than 105,000 CAPS investors to make better decisions.

To put this approach into practice, we'll screen for stocks that have been slashed by at least 25% in the past month and that have a market cap of greater than $100 million and a beta of less than 3. That'll keep us out of the mud-filled world of gyrating penny stocks.

Here's a sample of stocks our screen returned:

Company

CAPS Rating
(out of 5)

1-Month
Price Change

Chipotle Mexican Grill (NYSE: CMG  )

***

(25.1%)

Discovery Laboratories (Nasdaq: DSCO  )

**

(29.2%)

Hovanian Enterprises (NYSE: HOV  )

*

(32.3%)

Standard Pacific (NYSE: SPF  )

*

(57.9%)

Beazer Homes (NYSE: BZH  )

*

(30.9%)

Return data is calculated as the difference between the closing price on April 18 and the closing price on May 22, per MSN Money's screen. Star ranking from CAPS. Data as of May 22.

Let's delve deeper into recent circumstances and find out why at least one of these stocks has been beaten so badly.

All hail the burrito
In the land of restaurant stocks, same-store sales growth is arguably the key measure of a company’s future growth potential. The other would be the expansion of stores into new markets. But if you can't grow sales at existing locations, all the new stores in the world won't give investors confidence that profits will expand. Good thing, then, that burrito king and Motley Fool Rule Breakers recommendation Chipotle is regularly rocking the comps with more than 10% gains in its last two quarters, even as it expands its store count.

But even as the business grows by leaps and bounds, the stock has continued to fall lower and lower over the past five months. Maybe it’s because recent comparable-sales growth has slowed from the 12.4% increase in comps reported in the third quarter of 2007. But the stock was trading at a stratospheric multiple of 82 times earnings at that point, so the wheels were bound to fall off this high-speed bus at some point.

There's sound reasoning behind the recent pessimism -- with the economy forcing consumers to tighten their spending belts and increases in commodity prices threatening margins, many investors are bearish on any retail venture facing these headwinds. Since separating from McDonald's (NYSE: MCD  ) in 2006, though, Chipotle has done little wrong in pleasing patrons and investors, and its ample growth shows no signs of letting up.

Even after falling more than 42% this year, Chipotle still holds a premium valuation of 37 times trailing earnings, far higher than peers such as Yum! Brands and Burger King. Investors today are essentially facing the basic dilemma of a great company at a not-so-great price. As such, many CAPS investors are split on Chipotle, with the valuation keeping 13% of the 1,809 investors who've rated the company in the bearish camp.

But this still leaves a large contingent -- including 423 of the 500 CAPS All-Stars rating the company -- believing this super burrito has the right stuffing to beat the market going forward. Chipotle is still growing its diluted earnings per share at a rapid clip -- almost 63% in the trailing 12 months. So if the company can maintain anywhere near -- or even half -- that level in future years, the stock isn't that expensive after all.

Whether or not you believe the reasoning behind a fall in any stock, your own research is more important than collective opinions. CAPS can help you quickly focus your due diligence and even point out potential pitfalls you may not have seen.

Add your take on these or any of the 5,600 stocks that 105,000-plus investors have covered in Motley Fool CAPS. It's totally free to be a part of the community, and the payback is more than worth it.

The Motley Fool Rule Breakers service bagged the Chipotle burrito early, banking on the company to crush the market. To see all the stocks David Gardner and the analyst team have recommended, take a free 30-day trial today.

Fool contributor Dave Mock habitually looks for silver linings in even the darkest of clouds. He owns no shares of companies mentioned here and is the author of The Qualcomm Equation. Chipotle is also a Hidden Gems selection. The Fool's disclosure policy is made of sugar and spice and everything nice.


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