As the second quarter comes to a close this week, let's take a look back at the past three months. It wasn't a spectacular quarter for the markets, and investors will be looking for a rebound in the third quarter. Today, I discuss five names that will be happy to see the second quarter end. These five have been some of the worst performers over the past three months, and likely can't wait for a fresh start on July 1. Let's see why these stocks dropped so dramatically, and speculate whether or not they can expect any sort of rebound in the third quarter.
Tempur-Pedic International (TPX):
The mattress firm was perhaps the biggest loser of the quarter, shedding nearly three quarters of its value. The first three weeks of the quarter were actually good for Tempur-Pedic, with shares up a couple of percent. However it's all been downhill since the company reported its first quarter earnings.
Tempur-Pedic's revenues were in line with estimates, and earnings beat expectations by two cents. But investors seemed unhappy when the company only maintained its yearly earnings guidance of $3.80 to $3.95. Analysts were expecting $3.97 at the time. Tempur-Pedic shares fell 20% the next day and continued lower in the days following. I even defended the name, as nothing I discovered in my analysis seemed to warrant the 30% drop in a week. I'll admit I was wrong on this one. Still, I'm not sure how many saw the decline on the horizon at that point.
By the close on Friday, May 4, shares of Tempur-Pedic had dropped from about $84 to $57. The following Monday, the price dove again by more than 8$ as chatter picked up about the company being the next favorite for short sellers. After rising back to $53.50, shares traded lower throughout May and hovered in the low $40s at the beginning of June.
But even with its stock price down more than 50%, things were about to get worse for Tempur-Pedic. On June 6, the company slashed its revenue and earnings forecast, setting an EPS number of $2.70. Tempur-Pedic originally expected $3.93 for the year. Shares plunged 49%, and have not recovered. At $21, Tempur-Pedic is trading at levels not seen since late 2009. I believe the company can rebound, but management is going to need to reassure investors with its next earnings report. If they don't, look for Tempur-Pedic's price to plummet further.
Shares of the social game developer started off the quarter with a decline following a larger-than-expected secondary offering. Also, the stock remained under pressure as reports surfaced that user levels for Draw Something, the hit game from Zynga acquisition OMGPOP, were peaking. Zynga shares continued their April slump as rumors surfaced that activity was declining in its top games. Disappointing financial information released in Facebook's (FB) latest S-1 statement also did nothing to help Zynga's ailing stock price.
When the company announced earnings in late April, it beat estimates on both revenues and earnings, and raised 2012 booking guidance. However, shares fell the next day. Going into the Facebook IPO, Zynga's stock was at $8.27 -- far from the $13.15 level the company had achieved at the outset of the second quarter. As Facebook shares dropped from the low $40s down to the mid $20s, Zynga shares fell in sync, to a low of $4.78.
However, Facebook's recent rebound had helped Zynga shares claw their way back to $6. Analysts are split on Zynga, with half calling it a buy and half labeling it a hold. However, the average price target of $12 implies that this stock could double. For now, Zynga's success will be heavily tied to Facebook, and the next round of earnings reports, especially Facebook's first public earnings report, will definitely be key.
The fashion accessories maker had one of the single worst days in the market this quarter. The company beat earnings expectations by a penny, but at $590 million, its revenues missed by $27 million. Fossil cited macro concerns, including weakness in Europe. The soft European market caused the company to lower its full year earnings guidance by a dime to a new range of $5.30 to $5.40.
Fossil shares fell almost $50 in one day, a decline of nearly 38%. Following a continued decline in the ensuing weeks, shares bounced back slightly before falling more than $3 again on Monday. Fossil's share price may have been buoyed slightly by the fact that the company dropped its earnings guidance by only 2%. That is minor, considering we've seen other growth names slash guidance by 20%, 30%, even 50%. However, Fossil could face additional fallout if it trims guidance again after second quarter. Perhaps the company's management should have lowered expectations a bit more, especially considering Europe's potential impact on its bottom line. We'll see where things shake out when Fossil reports earnings (currently expected in early August).
Research in Motion (RIMM):
The Blackberry maker closed at a new low on Monday, just above the $9 level. Investors have continued to dump the stock as Research In Motion lags further behind in both the smartphone and tablet race. The company's long-term viability depends on its Blackberry 10 phones, which are slated (hopefully) to come out later this year. Still, even that may be too late.
The company is expected to post its quarterly results this week, but the report could be a non-event based on its early update. I don't see how expectations could be any lower for the quarter, with analysts forecasting a 36% year over year decline in revenues. A quarterly loss is also possible.
More than the numbers, Research In Motion's management will be the real subject of investor scrutiny. The company is currently undergoing a major restructuring. Additionally, investors will be watching to see if Research In Motion offers any update on the BB10 release. The company stopped providing financial guidance after last quarter, so I don't expect to see any for the current quarter.
At this point, long investors in this stock have two hopes -- the BB10 phones and the possibility of a takeover. It usually isn't a good idea to invest in a name on takeover speculation alone, unless the company has good fundamentals. Research In Motion doesn't have good fundamentals right now, which is why its stock has lost two thirds of its value in the past year.
If you compiled a list of stocks that have been on a roller coaster during the past few years, Dendreon would be on it. The biotech name behind the prostate cancer treatment Provenge has seen its share of ups and downs, and this quarter has been a down one.
Dendreon shares fell after Q1 quarterly revenues were just in line. Earnings beat estimates on an adjusted basis, but missed on a net basis. Sales of Provenge rose 6.5% quarter over quarter, with the company forecasting single digit growth for the second quarter as well. Analysts are concerned with that low growth level and the profit margins associated with the treatment. At that time, a Citi analyst said that an acquisition was the only potential upside in the name. Ouch.
Shares continued to fall after Dendreon acknowledged that the SEC has opened an investigation (See note 12 of their recent 10-Q for an explanation) connected to lawsuits accusing the company of misleading investors over Provenge. Multiple analysts have also suggested during the quarter that Medivation (MDVN) is a better acquisition target than Dendreon because Medivation has a rival prostate cancer treatment that has posted decent trial results.
Dendreon still is not profitable on a total company level, and that has scared investors who were hoping for profitability by now. Dendreon shares plunged 65% in one day last August when it reported that adoption of Provenge was slow. Huge double digit percentage declines are not surprising, and more declines could be on the way if Provenge sales continue to disappoint.
Performance / Conclusion:
The following table shows the performance of these five names during the second quarter so far:
And just because a company's stock price has already dropped 50% or 75%, that doesn't necessarily mean it will rise again. These companies' shares could easily fall further. For some, weakness in Europe has been an issue. But for all, slower-than-expected growth has been the root cause of their stock woes. When a company doesn't meet estimates, its stock price falls. It's that simple. Here's to a kinder, gentler third quarter that brings these companies greater success, and better stock performance.