Why Did My Stock Just Die?

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The markets dropped yesterday as the supercommittee for deficit reduction couldn't reach a compromise, meaning that $1.2 trillion in spending cuts kicks in -- in 2013! So the politicians punted responsibility till after the upcoming elections, and your stock 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:

Stock

CAPS Rating(out of 5)

Monday's Change

Focus Media (NAS: FMCN)

**

(39.5%)

VanceInfo Technologies (NYS: VIT)

**

(18.4%)

Sify Technologies (NAS: SIFY)

**

(15.8%)

With the Dow falling almost 250 points yesterday, or 2.1%, stocks that went down by even larger percentages are pretty big deals.

Muddying the waters
It's no fun owning a stock accused of financial shenanigans -- just ask me, I own Bio-Reference Labs (NAS: BRLI) , which was the target of a two-part Street Sweeper expose. Now, though, Focus Media is facing what appears to be some nitty-gritty, down-in-the-numbers analysis alleging that the company has engaged in fraud.

Short-selling firm Muddy Waters took aim at the Chinese media outfit and declared it was "fraudulently overstating" its numbers while insiders were running the company for their own benefit. Specifically, Muddy Waters alleges Focus Media overstates the number of LCD screens in its network by 50% while overpaying for a string of acquisitions that it then wrote down on its financial statements as a means of hiding losses.

Focus Media certainly isn't the only Chinese company to face allegations of fraud. Muddy Waters itself has questioned several, including Orient Paper and Spreadtrum Communications (NAS: SPRD) , about their financials. Earlier this month, Citron Research, another high-profile short-seller, attacked Chinese Internet company Qihoo 360 Technology (NYS: QIHU) -- an attack that Qihoo didn't hesitate to fight back on.

Although 94% of those CAPS members rating Focus Media think it would outperform the broad market averages, its low two-star rating suggests they believe there are better places for your money. The most recent comments highlight the Muddy Waters report, underscoring one fund manager's view that "if I see a sell recommendation from Muddy Waters, I'm going to sell and ask questions later."

Add Focus Media to your watchlist to watch as it fights back -- if it can -- against the allegations.

Can we outsource losses?
A week after Chinese IT outsourcing specialist VanceInfo Technologies was punished by the market for rehiring the auditor who has been at the heart of some of those scandalized Chinese companies -- Deloitte was the auditor for Longtop Financial -- it posted some encouraging third-quarter results that helped boost shares by more than 40%. The market did beat back the stock somewhat, perhaps in light of the Focus Media allegations. Call it a tarnished halo effect, as I found no company-specific news to account for the drop.

Or maybe it fell in sympathy with Sify Technologies, which was beaten down over the widening scope of the MF Global bankruptcy. As the amount of investor losses at the trading firm mounts to $1.2 billion, investors are worried about the relationship Sify has with MF Global in a joint venture in India.

The Indian IT specialist was flying high earlier this month after its own third-quarter results came in strong, and as its enterprise segment -- Sify's largest -- experienced 7.5% growth from the year-ago period. While its smaller commercial and consumer segment that houses its broadband access and cyber cafe business withers, which could be problematic for Internet portal Rediff.com (NAS: REDF) , the main engine of growth for Sify was still intact.

Like Focus Media, both VanceInfo and Sify have strong CAPS community support (90% and 91%, respectively) that they will outperform the broad market averages. Yet, both also sport low ratings just like the outdoor advertiser, meaning whatever hopes they had for their future were tepid at best.

Tell us on the CAPS pages of both VanceInfo Technologies and Sify Technologies if you think they'll bounce back from here, and follow their progress by adding them to the Fool's free portfoliotracker.

Ready for a resurrection
Just because your stock has taken a beating, that doesn't mean it's going to roll over and die. Markets are known for overreacting. A closer look on Motley Fool CAPS at what's happened to your stock can give you an edge over other investors who just react to the market's lead. With CAPS, you can decide for yourself whether your stock ready to come back from the dead.

At the time this article was published Fool contributor Rich Duprey owns shares ofBio-Reference Labs. Click here to see his holdings and a short bio. The Motley Fool owns shares of Bio-Reference Labs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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