One way or another, 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, I'm reaching deep into the grab bag of missable targets to come up with one plain old disappointment, one brilliant "sell" call, and one ridiculously cheap and spicy bovine. Read on!
Carbon fiber producer Zoltek
Management blamed its ornery customers, who worked through some excess materials last quarter rather than ordering new stock, and also insisted on shutting down their factories over the holidays. Of course, management spun this as a good thing: "With our increasing capacity, our customers are more confident that we will be able to supply all their requirements and, consequently, they worked down some safety stocks," said CEO Zsolt Rumy. He insisted that there was still plenty of demand.
It's hard to find much of a reason to invest in Zoltek today. The share price fell roughly 20% after this gloomy report, and now sits about 50% below the 52-week high. It's hardly a deep-value discount, though. Zoltek trades at 133 times trailing earnings, has consistently negative free cash flow, and its fortunes are tied to the needs of a handful of large customers. If you insist on carbon fibers being The Next Big Thing, I'd look into somewhat larger and more stable competitors like Hexcel
All that glitters ...
Rule Breakers recommendation Blue Nile
Blue Nile isn't alone in its lowered expectations for the luxury retail sector. Not evenTiffany
Tom Gardner's Hidden Gems newsletter used to recommend Blue Nile, too, but switched to a "sell" recommendation last September. That was an exceptionally well-timed sale, within 10% of the yearly highs and just before a 56% descent to today's share price. It's never easy to let go of a winner, but Tom's analysis makes it look inevitable.
As for buying back into the growth story, fellow Fool Rick Munarriz thinks that there's plenty of room for a bigger discount here. I couldn't agree more. Sales growth of 10% is the essence of management's hopes and dreams right now, but the stock is priced at 45 times earnings.
Wild wings over Buffalo
Let's end this week's tawdry throwdown on a positive note. National sports bar chain and current Hidden Gems recommendation Buffalo Wild Wings
More importantly, CEO Sally Smith is keeping a level head, and maintains her goal of 25% earnings growth in 2008 despite a tough economy. Mr. Market cheered and immediately sent the stock up by 9%. Here's the best part: I don't think the boost was generous enough.
My calculation of what I believe is a fair PEG ratio suggests that the stock is 25% too cheap today. And that doesn't even take into account the fact that Buffalo likes to underpromise and overdeliver on its targets, or the possibility that the current recession ain't as deep as everyone fears. I'm riding this winged mammal for at least another year.
So long, and thanks for all the fish
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:
- Marry Rick, Blue Nile
- Foolish Forecast: Buffalo Wild Wings Flying High
- The Best Opportunity This Decade
- Why You Should Buy Now