3 Strikes and Consulting Companies Are Out

As I perused what positions to close this weekend, Huron Consulting (HURN) looked like a good candidate, but I wanted to give these guys 1 more chance with earnings out this week. I consider Huron Consulting to be the Goofus of the sector [Mar 27: Adding to Huron Consulting on Earnings Warning] but enough is enough - its warnings have gone from mildly amusing to annoying. They "beat" but that's because they warned in March... so it's not a real beat in my book; it's a "Wall Street" beat.

• Huron Consulting Group Inc (HURN) posted a quarterly profit above market estimates, helped by a 32 percent rise in revenue from its health and education consulting segment, but slashed its 2008 outlook.
• The weak outlook comes at a time when the credit crisis in the United States is widely being seen as a boon for consulting companies. (that's what I thought) The consulting business is expected to flourish as the ongoing downturn in the economy has increased the probability of investigations, litigations and bankruptcies.
• At the end of the fourth quarter, the financial services consulting company had forecast a very upbeat 2008 as it sought to gain from worsening credit and housing markets. (credibility... lack of)
• For 2008, the company now expects earnings of $2.57 to $2.88 a share, on revenue of $590 million to $620 million. Earlier, it had expected earnings of $3.10 to $3.28 a share on revenue of $640 million to $670 million.
• Huron had slashed its first-quarter earnings estimates in late March, citing weak financial consulting business.

When management cannot perform to expectations, it's time to cut bait. I originally bought this name and one of it's peers (Gallant) FTI Consulting (FCN) as plays on litigation and restructurings coming in the US economy [Nov 27: 2 New Recession Plays: Huron Consulting and FTI Consulting], but I've only been 1 for 2 in this sector. I wrote:

I am not buying much here, but looking for some long positions that will zig while the rest of the portfolio zags. Two stocks I have been eyeing for a long while are and Huron Consulting (HURN) & FTI Consulting (FCN). I will call both companies plays on a slowing economy and future bankruptcies of 2008/2009. FTI Consulting is the best of class, and Huron is the rebound kid which has faltered of late - so I am buying both to create a mini "consulting" basket. They are also becoming plays on globalization as they expand their presence worldwide. These won't be companies that rocket 30% in a month, but should hold up in a slowing US economy and most importantly are very different type of companies from what I currently have in the fund, so provide some diversification.

So much for the "rebound kid" thesis. If I add another name in this sector it will probably be the 3rd main player Navigant Consulting (NCI) but at the time I added these 2 names I was trying to find some ways to diversify away from commodities, and since then I've added other types of stocks that do that - so it might not be necessary.

Now a case could be made, that like the homebuilders, financials, retailers etc that there is nowhere to but up since all the bad news is out - but this is the 3rd warning since November, so it shows me a management who cannot drive the car straight. If this is indeed the bottom (the stock is UP today on this newest miss) I'll let someone else benefit. Despite the stock being "cheap", without management credibility, you don't have much. So this is strike 3 - they're out.

Looking at this chart, makes yet another case for trading around positions - last November I was buying in the $60s when I first started the position, now it's had a 50% haircut. But by adept trading and having low exposure going into earnings, and buying on dips (i.e. I bought on the last warning around $40) I've "only" lost $1700, which if you look at the horror show below is a small miracle. I'll take that and thank my lucky stars - the stock was as low as the $40.60s today but I am exiting my 0.7% stake on the rebound to $45.60s (what an intraday swing). I've held this position in the portfolio since November 2007.

I also cut back my FTI Consulting (FCN) position as it just broke below its 50 day moving average - in the perverse market, the stronger player is down on the weaker player's earnings. That's the market for ya. I've cut FCN down to a 0.8% stake from 1.5%; chopping in the $62.60s.

Down to 54 long positions.

Disclosure: Long FTI Consulting in fund; no personal position