Before the opening bell last Thursday, Hidden Gems recommendation Fresh Del Monte Produce (NYSE:FDP) announced it was cutting its earnings outlook for the year by $0.50 per share. The market promptly rewarded the company with a 5.8% price drop at the opening bell, and the stock closed the day down 6.5% at $24.91. Shortly after the market opened that day, Wachovia analyst Jonathan Feeney downgraded the stock from "outperform" to "market perform," basing the decision upon what some would say are short-term concerns.
The question of the day is: Why did Mr. Feeney downgrade the stock? He went on to say that Fresh Del Monte Produce has a "reasonable valuation" and that "the company has substantial long-term growth prospects, high cash flow and a strong balance sheet." He also wrote that "a sizeable miss from an inexpensively valued cyclical company is not a major concern."
Now I do not know about you, but to me Wachovia's downgrade does not make much sense given the other statements. If the company really does have "substantial long-term growth prospects" and the rest -- all excellent things to have -- why in the world is Wachovia not advising people to buy more? For a good company, a drop in price should be reason to dance in the streets while buying more at a lower price, not a reason to run away.
I like to view price drops following bad news as Mr. Market presenting me with a buying opportunity. For instance, over the course of last April, Nokia (NYSE:NOK) dropped more than 32% after news of missed earnings and lowered market share near the beginning of the month. Eight analysts downgraded Nokia's stock that month. People who bought during the drop, while still possibly in the red, trust that the company will overcome this difficulty. These stockholders should see healthy gains as the price recovers. Some already have -- shares are up 30% from their August low. Last week's news about Merck's (NYSE:MRK) recall of Vioxx has prompted me to start taking a closer look at this giant.
Try not to let bad news scare you out of owning a company. Emotion is a poor reason to buy or sell. Take the time to think about the news, its impact on the company, and what the company is doing to address it. Perhaps your evaluation will still prompt you to sell Fresh Del Monte or Merck, but at least you'll be making an informed decision.
Bad things happen. Good companies overcome them and justify their place in our portfolios.
Fool contributor Jim Mueller tries really hard to keep his emotions in check, except when he eats Fresh Del Monte's golden pineapple. He owns shares in Nokia and Fresh Del Monte Produce.
