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3 Stocks That Missed the Mark

By Anders Bylund – Updated Apr 5, 2017 at 5:17PM

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A peek at companies that overpromised and underdelivered.

There was no shortage of earnings misses 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.

These companies, then, were just three of the many that didn't live up to Mr. Market's expectations last week. Let's dive in!

If I wanted perfection, I would have hired a robot ... or a Swede
The first underperformer today is Rule Breakers pick iRobot (NASDAQ:IRBT). The analyst gang had hoped for a small profit -- perhaps $0.01 per share -- but the company handed out a $0.06 loss per share instead.

iRobot's share price jumped up 14% overnight after this report, because sales grew a hefty 16% over last year and the company raised its revenue outlook for the year by a couple of percentage points. More specifically, because production ramp-up by a new contract manufacturer was slower than expected, sales were delayed on the new Roomba 500 series of cleaning robots.

This stock has taken a heart-stopping roller-coaster ride since the last earnings report, by turns up by as much as 47% in a month and then down 28% overnight. The share price today is 7% lower than it was 90 days ago.

That's life with a Rule Breaker. The promise of massive returns is tempered with shocking short-term volatility, and you need a seriously long-term investing horizon to stomach the swings. Indeed, iRobot has yet to live up to its recommendation in the Rule Breakers newsletter service -- it's down more than 40% since getting the nod.

But that doesn't mean you should give up on the robotic pioneer -- fellow Breaker Akamai (NASDAQ:AKAM) recently dipped 48% in a six-month period, but it's still a three-bagger for investors who jumped on the original recommendation. iRobot does have some challenges, such as fighting a former employee over military contracts and patent lawsuits. And of course, there are no sure bets in investing. Still, it's hard not to see a tremendous opportunity here, and you might want to take a free 30-day trial to Rule Breakers so you can read up on the robots.

Market mood swings
Moving right along, we find another high-tech disappointment. Shares of Ultra Clean Holdings (NASDAQ:UCTT) hit the sidewalk after a 17% overnight drop last Tuesday, having reported an 8% year-over-year revenue drop and earnings 25% below the Street consensus of $0.20 per share.

Ultra Clean makes equipment for semiconductor manufacturing. The equipment is so specialized that its main customers are other equipment makers, such as Applied Materials (NASDAQ:AMAT), rather than Motley Fool Inside Value recommendation Intel (NASDAQ:INTC) and other chip makers.

In the attendant conference call, CEO Clarence Granger told analysts that this was a "challenging period for the industry in which we saw a progressive softening of demand from nearly all of our customers." Management can rarely predict the market more than a quarter ahead, because Ultra Clean is twice removed from the front lines and subjected to two levels of ordering fluctuations.

The miss this time fits into a larger picture, where other equipment makers also report a chip industry hesitant to invest in new equipment right now. If you think you know which semiconductor designers will come back faster and higher than the rest, feel free to invest in them directly. On the other hand, the equipment layer lets you invest in the sector without picking a specific winner, so someone like Applied Materials gives you a lower-volatility way to tap into that approach. Ultra Clean would be the high-risk, high-reward bet.

Double whammy
Let's end this rundown with a quick hit: Financial powerhouse Merrill Lynch (NYSE:MER) was expected to lose about $0.45 per share, but the actual loss was a much larger $2.85.

Merrill did warn us that the quarter would be bad, including an expected $4.5 billion writedown on the fixed-income division's portfolio of collateralized debts and subprime-mortgage loans. But the final writedown was a whopping $7.9 billion, proving that no one is safe from the mortgage-bubble and liquidity-crisis double whammy. Goldman Sachs (NYSE:GS) has escaped relatively unscathed so far, but the plight of Merrill should keep all of the finance pashas on their toes.

Foolish finale
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 really are stuck in the mud. Want some professional input? Grab a free 30-day trial to our Motley Fool Inside Value newsletter service to see the latest deep-discount ideas Philip Durell and his merry men have dug up.

Further Foolish reading:

Fool contributor Anders Bylund owns shares in Akamai but holds no other position in the companies discussed here this week. Last Christmas, he gave his wife a Roomba, which she now calls her "little helper" when the kids aren't chasing it around the living room with a broom. You can see his current holdings for yourself, and the Fool has a disclosure policy.

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