Bring On the Pain!

Lowering guidance can bring on a world of pain for a company. Not only does the stock take a hit when the news is announced, but it can also continue to fall for quite awhile afterwards. Investors face a dilemma: Is it time to join the mad dash for the exits, or is this a buying opportunity in disguise?

A guide to the future
It's not always easy to tell whether your company is having a fire sale, or whether it’s simply burning down. With the help of Motley Fool CAPS, however, understanding the difference becomes a whole lot simpler.

Our investor-intelligence database compiles the opinions of more than 105,000 professional and novice investors about stocks they think will outperform the market -- and those they think will not. Pairing that information with companies that have recently lowered their guidance should help us decide which of the stocks are hotter than hot, and which ones are not worth wasting water to douse. A high CAPS rating with lowered guidance could present you with a real deal.

Here are five companies that have recently guided lower, and some details on what CAPS investors think:

Company

Period

Analyst Est./Previous EPS Guidance

Updated EPS Guidance

CAPS Rating (out of 5)

Agrium (NYSE: AGU  )

Q2 08

$2.53

$1.92-$2.22

*****

Dominion Resources (NYSE: D  )

Q2 08

$0.54

$0.47-$0.52

****

Dynamic Materials (Nasdaq: BOOM  )

Q2 08

$0.56

$0.42

*****

Federal Express (NYSE: FDX  )

Q4 08

$1.69

$1.45-$1.50

***

Novatel Wireless (Nasdaq: NVTL  )

Q2 08

$0.16

$0.10-$0.13

****

Sources: Briefing.com; Motley Fool CAPS.

Now, this isn't a list of stocks to buy. Nothing is failsafe in investing, so consider this a list for further research.

Click, click. Boom!
Dynamic Materials uses explosives to weld together metals that otherwise can't be joined. Its explosion-welded carbon steel and titanium plates -- made using a process acquired from DuPont (NYSE: DD  ) -- are used in equipment for oil refineries, chemical plants, and navy ships. That kind of business has led to some explosive growth of its own: Net income has grown at a compounded rate of 68% over the past five years on a 37% compounded growth rate in revenue.

While its guidance for the second quarter didn't set off any fireworks, the industrial metalworking company left intact its full-year guidance of 60% revenue growth, a move suggesting that the second half of the year will be strong based on its recent acquisition of DYNAenergetics. That has a lot of investors thinking Dynamic Materials has become a booming opportunity since the selloff in its shares.

Acknowledging that it's likely to be as volatile as the materials it handles, All-Star CAPS player ww2004 believes the industries the company serves are just too important to fade away anytime soon:

A stock that has been beaten down more than it deserves. This is a good time to add as an outperform. The current concern about the rapid increase in the price of steel should fade over the next year as expectations adjust. Plus the customers that utilize the technology of [Dynamic Materials]; energy companies, shipbuilding and oil refineries, aren't likely to go away any time soon. Volatility expectations lead to the year or so time frame.

Another top-rated investor, tuffsledding, can't get his head around the math of the earnings report and the amount the stock broke down:

The selling is overdone. The PEG is good and their prospects remain robust. I have never understood why a 10% reduction in earning estimates warrants a 40% drop in price.

Guide on!
Looking at stocks whose shares have taken a dive on diminished outlooks can be a painful experience. Your input, though, can help guide other investors to higher prospects for growth -- even in the face of lower guidance. Head on over to Motley Fool CAPS, and let your voice lead the way.

Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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