Why Did My Stock Just Die?
CAPS Rating(out of 5)
|Ternium (NYS: TX)||****||(18.0%)|
|Youku.com (NAS: YOKU)||*||(16.1%)|
|CF Industries (NYS: CF)||*****||(11.3%)|
Source: Motley Fool CAPS.
With the Dow falling another 135 points yesterday, or 1.1%, stocks that went down by even larger percentages are pretty big deals.
Caught between a rock and a hard place
Paying an exorbitant premium for a minority position in a constrained industry hardly seems like a smart or strategic move, yet that's exactly what sent shares of Brazilian steelmaker Ternium dropping yesterday, after it pursued a minority stake in rival Usiminas while paying a 72% premium for the privilege.
With rising raw materials costs and tough international competition creating a difficult pricing environment in the domestic markets, analysts didn't see what benefits Ternium would derive from the purchase, other than denying smaller steelmaker CSN the chance to do so.
There might be some synergies to wring out of the deal if Brazilian mining giant Vale (NYS: VALE) is correct that ore prices will be more stable next year than they have been in 2011, and the World Steel Association says emerging markets should consume almost three-quarters of the world's steel in 2012, with global demand expected to grow more than 5% over this year's figures. Gerdau plans to maintain its investment program for the foreseeable future, but with world markets so unsettled, nothing is off the table.
Analysts had been unanimous in their opinion of Ternium's prospects before the deal, and the CAPS community was highly supportive, with 95% of those rating the steelmaker thinking it would outperform the broad indexes. Add the stock to your watchlist to see whether it can steel itself from criticism over the deal.
Seems to me the market is misreading Youku.com's wider than expected loss for the third quarter. While non-GAAP losses expanded to $0.07 a share compared to the $0.03 analysts anticipated, the Chinese Internet streaming video specialist also changed some accounting measures for content costs that increased the effects of the loss. Had the company used the same methods this year that it did last year, the loss would have been more than halved from $4.4 million to $2.1 million, or about $0.02 a share, beating expectations.
Not that I'm particularly enamored of Youku's business model, but I think the reaction here is overwrought. It has increasing pressure from the likes of Sohu.com (NAS: SOHU) , and Google has shown that monetizing video through YouTube is a difficult process. But its premium content deals with Dreamworks Animation and Time Warner should give it a boost.
When a company has a lot of moving parts that make it difficult to compare one period to the next, it's not surprising that confusion reigns. I'm not sure I see Youku as a long-term winning investment, but I think yesterday's drubbing was too much. Still, I can understand CAPS member Jeffrey2012's incredulity at the results.
So let me get this straight, the more you grow your revenue, the more money you lose. That sounds like a great recipe for shareholder destruction. Not to mention them failing to meet their own guidance is seeing their earnings getting whacked.
Even so, I've marked them to outperform the markets on CAPS, but only for the next few months because I think they'll bounce up momentarily from this decline. Let us know on the Youku.com CAPS page if the market is reading the videophile's results right, and add the stock to your watchlist to see how it plays out.
A cornucopia of problems
As corn prices plunged amid weak demand, shares of fertilizer stock CF Industries dropped with them. You would think all fertilizer companies would be similarly affected, and while PotashCorp (NYS: POT) , Mosaic (NYS: MOS) , and virtually all the companies in the sector did see their stock drop, they fell significantly less than CF.
That might be because CF is more closely aligned with the corn crop of the U.S. than its rivals. While nitrogen is used to fertilize all crops, CF transports ammonia from its Donaldsonville facility to some 20 terminals in the U.S. corn belt. With corn sales last week 75% below the five-year average, pricing will be crushed without renewed corn demand, and demand for fertilizer will drop. Wheat prices are also in the balance as it has to stay competitive with corn, meaning there could be widespread weakness in the market.
Some 97% of the nearly 1,200 CAPS members rating CF think it will ultimately outperform the market, with much of the thinking being that the world still has to eat and that means farmers will have to fertilize their crops. Yet there is an ebb and flow on what farmers plant based on prices they can obtain, and while the government's mandate for ethanol has propped up corn prices and led to greater amounts of acreage being planted, slack demand can cause temporary distortions.
Investors might want to use such weak moments to buy shares if they think it will eventually rebound. Tell us your thoughts on the CF Industries CAPS page and follow its movements by adding the stock to the Fool's portfolio tracker.
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 is ready to come back from the dead.
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of DreamWorks Animation, Google, and Sohu.com. 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.