Your stock just took a nosedive -- but don't panic. First, let's see whether it had good reason to fall. Sometimes, panic-fueled drops can make excellent buying opportunities. Here's the latest crop of cratered stocks that could provide a possibility for profit:


CAPS Rating (out of 5)

Monday's Change

Arena Pharmaceuticals (Nasdaq: ARNA)



Flagstar Bancorp (NYSE: FBC)



Level 3 Communications (Nasdaq: LVLT)



The devil's in the details
At one point, Monday's market was 1.5% below the highs it hit early on; it regained some ground by the end, closing just 0.2% lower. In that light, the day's far larger declines are big deals.

So much for analysts' hopes of a turnaround at ailing Flagstar Bancorp. The company has now reported a string of eight quarterly losses. The bank is controlled by private equity firm MatlinPatterson, and its owners want to dip into the well of share sales again, possibly selling off a $600 million stake of the firm to other private equity companies. In February, MatlinPatterson sold $300 million worth of the company to shareholders -- far less than the $500 million executives were hoping for.

MatlinPatterson's purchase of Flagstar caused the Federal Deposit Insurance Corp. to rewrite the rules regarding private equity firms buying troubled banks. Previously, the Fed prohibited P/E companies like Blackstone and Carlyle Group from owning majority interests in banks, because they're not registered as banks themselves, and there may be conflicts of interest. Critics feared that if a P/E company's commercial business ran aground, the bank it owned might founder. When the Office of Thrift Services went off on its own and approved the deal, it raised a lot of eyebrows. Carlyle, along with WL Ross, later won FDIC approval to purchase BankUnited.

With 42% of CAPS members rating Flagstar to underperform the broad market averages, it appears that many Fools weren't surprised when the market withdrew its support for the bank.

The sky's not the limit
A convertible note offering apparently sunk telecom services provider Level 3 Communications yesterday. The company wants to offer $175 million of convertible senior notes, due 2016, with $26.25 million more to cover overallotments, and use the proceeds primarily for general company purposes. Level 3 has been facing tighter competition from Akamai Technologies (Nasdaq: AKAM) and Neutral Tandem (Nasdaq: TNDM), causing last quarter's revenue and earnings to sag.

The new debt offering will weigh heavily on the company, says CAPS member branshew:

Too diversified for their own good. Debt levels can't be sustained for too much longer, especially with their current 175M offering.

Don't bring me down
The weight of safety concerns over Arena Pharmaceutical's anti-obesity drug locaserin caused the company to shed value like a contestant on The Biggest Loser. Ahead of an advisory panel meeting tomorrow, the FDA released a briefing document that raised concerns about lorcaserin's efficacy, but the market's reaction may just be a typical case of overreaction. Investors are still gun-shy after VIVUS (Nasdaq: VVUS) got its fat therapy Qnexa shot down; VIVUS lost more than half its market value in the ensuing sell-off.

This could actually be a ripe opportunity to pick up some shares cheap and reap the benefits if the FDA panel rules in its favor. (I'm heading over to CAPS to enter my thumbs-up now.) Most of the issues raised in the briefing paper were already known, but investors might have been particularly alarmed to discover that rats taking superhigh dosages of locaserin developed cancer.

Now, I'm no scientist, but I thought we had gone beyond such testing. After all, taking dosages no one in their right mind would ever consume would lead to all sorts of negative outcomes, cancerous or otherwise. Remember cancer-causing potato chips? A human would have had to eat 35,000 potato chips (more than 60 pounds) every day for life to get the equivalent dosage of the chemical acrylamide that caused tumors in lab mice.

Yet locaserin also helped patients shed pounds, and with Orexigen Pharmaceuticals (Nasdaq: OREX) and its own weight-loss treatment coming up for a hearing next month, this is obviously a pivotal point for Arena. However, CAPS member JuanPeter realizes that placing your faith in the FDA is a bit of a gamble:

What has changed since then? yes, nothing at all apart from an FDA panel date and massive speculation. A final comment: one may have a load of reasons on the Yes side or on the No side, but remember: playing FDA panels and PDFUAs is just that, a play, a gamble. You never know what's gonna happen at the end of the day

Ready for a resurrection
Just because your stock has taken a beating doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look at what's happened to your stock can give you an edge over investors who merely react to the market's lead.

That's why it pays to start your own research on these stocks on Motley Fool CAPS where you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from the stock's CAPS page. Then you can decide for yourself whether it's ready to come back from the dead.

Akamai Technologies is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Neutral Tandem. Try any of our Foolish newsletter services free for 30 days

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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.