7 Days Group Shares Got Crushed: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: After holding up relatively well for most of the day, shares of 7 Days Group Holdings (NYS: SVN) fell off a cliff around 1:15 p.m. ET today, ending the day down 15%. But if you ask me why, I just don't know.

So what: After all, it's been two days since the self-proclaimed "leading economy hotel chain" in China announced that its chief operating officer was resigning. And the stock bounced right back from that bit of bad news.

On the other hand, there's plenty of reason for investors to feel uncertain about this stock. Priced at a seemingly expensive trailing P/E ratio of 33 today, 7 Days is expected to post strong profits in the coming year. Strong enough, in fact, that if investors are patient, Wall Street assures us that today's price today will soon equate to barely 4 times this year's eventual earnings and less than 3 times next year's profits.

Now what: For a stock that most analysts agree will grow earnings at 30% per year over the next half-decade, that looks unbelievably cheap. Don't buy it. Although 7 Days is supposedly "profitable" today, Capital IQ tells us that it hasn't generated a lick of actual free cash flow at any time in the past five years. To me, this calls 7 Days' quality of earnings into question. Based on today's sell-off, I'd say that's becoming a popular suspicion.

Is 7 Days for real? Will it prove the skeptics wrong?Add the stock to your Fool Watchlist, and find out.

At the time this article was published Fool contributorRich Smithhas no financial position in 7 Days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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