3 Stocks That Missed the Mark

These three companies just didn't live up to Mr. Market's expectations last week. Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down.

Today, we'll traipse through a fairy-tale land to sort out the princes from the frogs. Don't worry; the business is still real.

Stone from a soup
Organic grocer and Stock Advisor selection Whole Foods Market (Nasdaq: WFMI) missed the analyst consensus mark on the bottom line, at $0.28 per share versus the consensus of $0.36, though revenue came up somewhat stronger than expected.

Management put a lot of effort into telling us that it's all right. The integration of Wild Oats is coming along nicely, but it just takes time to convert the technical systems and store layouts, especially while imposing a new corporate culture on the new staff. That's a well-known quantity, though, and CEO John Mackey almost sounds cocky when he explains the costs and benefits involved:

We are making up-front investments to raise the Wild Oat[s] stores up to our high standards including investments in repairs and maintenance of the stores, lower prices and expanded perishables offerings and increased labor. And these costs are in advance of what we expect to be a significant long-term improvement in sales.

A smooth integration process this time is more important than ever, because it's simply the last time you'll see Whole Foods take over such a large chain of organic grocery stores. From here on out, it'll be mostly organic growth (appropriately enough) unless Whole Foods reaches over into the pool of standard grocery stores. And if converting Wild Oats is hard work, it would take a lot more to get Winn-Dixie (Nasdaq: WINN) or Great Atlantic & Pacific Tea (NYSE: GAP) up to speed. So enjoy this challenge while it lasts.

The emperor who became a frog?
If China is hot, and solar power is hot, then Chinese solar-cell manufacturers must be smokin', right? Not necessarily. Take Rule Breakers recommendation Suntech Power Holdings (NYSE: STP), for example.  The (all together now!) Chinese solar-cell maker reported $0.34 of earnings per ADS on $398 million in revenue, where the analyst gang hand expected $0.36 per ADS and $420 million, respectively.

Granted, it was still an impressive improvement over the previous year, with an 82% revenue gain and a 47% jump in adjusted earnings per depositary share. It just wasn't as good a quarter as it should have been. Suntech had to resort to deep discounts to move out aging inventory, which damaged both margins and sales.

On the bright side, management says that it landed a series of propitious silicon supply contracts that should lower the cost of product faster than sale prices in 2009. On a darker note, securing that materials supply forces Suntech to ramp up its manufacturing capacity slower than some investors had hoped. Short-term pain for potential long-term gain -- I can respect that.

If bumpy rides make you sick, then solar power stocks aren't your cup o' joe. In the past five months alone, Suntech shares have rocketed up by 125% and then dropped right back to the starting point again. Yingli Green Energy's (NYSE: YGE) stock chart tells an equally bloodcurdling story, and though First Solar (Nasdaq: FSLR) has doubled in that time frame, it has still fallen more than 25% from its 52-week high in December. Tread lightly in this sector, Fool -- and pick your entry points with care.

A sheep in wolf's clothing
Income Investor pick CapitalSource (NYSE: CSE) reported adjusted earnings of $0.51 per diluted share, discounting the effects of some elaborate interest rate hedge accounting. That wasn't enough to measure up to Wall Street's $0.59 EPS expectation.

The middle-market commercial lender did see stronger loan performance metrics year over year, including fewer overdue payments and lower bad credit charge-offs. Given the positives, management feels secure enough to keep paying a $0.60 quarterly dividend per share. In 2007, CapitalSource paid out $2.38 per share in dividends on $2.32 in earnings.

The improving metrics set this company apart from pending disasters like the falling NovaStar I spotted in the summer of 2006. NovaStar was trying to keep a brave face as it careened over the edge of the subprime cliff, and eventually had to stop the gravy train of nice, fat dividends. CapitalSource has more than $3 billion in liquid assets and nearly $21 billion of assets under management -- up from $17 billion a year ago.

In short, the dividend looks secure, despite a hefty 15% dividend yield. You usually don't get that kind of performance without risk. I'm not surprised in the slightest that our Income Investor team is keeping the faith.

Fairy-tale ending
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps, and which ones are stuck in the mud for real.

Further Foolish reading:

• Whole Foods Soldiers On
• Suntech Power Overshadowed
• Don't Invest With Dirtbags