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 a while afterwards. Investors face a dilemma: Is it time to join the mad dash for the exits, or is there a buying opportunity in disguise?

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

The investor-intelligence database compiles the opinions of more than 110,000 professional and novice investors about stocks they think will outperform the market and those that they think won't. 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 aren't worth wasting the 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, coupled with what CAPS investors think:

Sources: Briefing.com, Motley Fool CAPS.

Now, this isn't a list of stocks to buy or sell short. Things rarely work all of the time in investing, so consider this as just a list for further research.

Green around the gills
There are many different reasons a company can expect profits to fall below expectations. Sometimes, it's because a business is faltering and revenue is drying up -- a situation that would rightly cause investor concern. Other times, however, it's because a business is growing and it needs to invest in buildings, people, and materials, the outlay for which cramps things short-term but ought to result in even more profits flowing in down the road.

Such seems to be the case with Evergreen Solar, which said that as a result of its megadeal with IBC Solar, its capacity is going to be near peak levels of 20 megawatts per quarter beginning in 2009, when its new facility comes online. That huge deal is leading to a near-term profit shortfall that investors shouldn't be worried about taking, for the moment. With some rivals, including Suntech Power (NYSE:STP), taking hits as a result of its having large exposure to Spain, where cuts to solar subsidies are being considered, Evergreen has hardly any presence there and ought to fare better. Big deals, lower exposure to soft markets, and a share price that's about 50% off its 52-week highs could equal tasty returns for investors after all.

It's the backlog of business and the willingness to invest in itself that has CAPS member chooptygirl seeing Evergreen Solar eventually basking in the sun.

This stock has accumulated over [$3 billion] backlog in contracts in the last quarter alone. It's only a matter of time before this will translate into earnings, as they are currently spending money on various manufacturing expanse projects hurting their bottom line. Once these projects are complete, the road to profitability will begin, and I can see stock accelerating to the upside if the world continues to adopt solar technology, and ESLR keeps raking in these huge contracts.

Out of sync
Cadence Design is a good example of a company whose lowered guidance is a result of negative events. Customers are placing greater demands on this maker of electronic design software, even as they've been cutting back on purchases. The company squeaked by in meeting expectations this quarter, but the change in outlook for the third quarter is just too dismal. It has lost nearly a third of its value so far today, and that's leading to speculation that its proposed acquisition of Mentor Graphics (NASDAQ:MENT) is in trouble.

CAPS member PhillyDan said last month that he figured the bid for Mentor was bungled from the get-go and that Cadence has been dancing with two left feet.

Cadence is one of those companies that can't get out of [its] own way. Their bid for Mentor Graphics was clumsy and ill-timed plus they offered too little to appeal to MG [shareholders]. ... Cadence wanted Mentor Graphics for their Electronic Board Level design tools that are far better than what Cadence [offers; therefore,] they should have offered at least 3 to 5 dollars [per share] more to buy MG.

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 to Motley Fool CAPS, and let your voice lead the way.