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Five Big Bears Ready To Roar For June 10

Posted: Jun 10, 2008 14:30 PM by Ayton MacEachern

Tickers in this Article: PPC, JRJC, WB, WBS, ACF

A company's fundamentals need to be explored when it has seen some serious price declines over a short period of time. A price decline can also signal something more sinister than a lowball entry point; it could just as easily be the start of a long downtrend in the stock's price or the beginning of the end of the company's success as a business.

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On the flip side, what seems like a large decline is often really just a small price correction that occurs as part of an overall movement in the market. For a long-term investor looking to find an entry point in an individual stock, these short-term price pullbacks are often a blessing in disguise.

Let's take a look at five stocks that have experienced relatively large declines over the past week, but still have a bit of bullish sentiment in our Stock Picking Community. By exploring them further, and by trying to determine what caused their drastic declines, we can be in a better position to help predict which have a greater chance to provide investors with gains in the long run.

The Bear Cave

Company	One Week Loss*	Community Sentiment
Pilgrim's Pride (NYSE:PPC)	23.4%	100% Bullish
China Finance Online(Nasdaq:JRJC)	21.7%	67% Bullish
Wachovia (NYSE:WB)	19.3%	88% Bullish
Webster Financial (NYSE:WBS)	17.5%	100% Bullish
Americredit (NYSE:ACF)	15.2%	100% Bullish
* Data as of market close June 9, 2008

It's been common for us to see a list of bearish stocks full of financials over the last year, and this week is no different. Four out of our five bears this week are financial services firms, which we are still more than comfortable staying away from for now. I am looking for a bit of bullish momentum across the sector before looking at these any closer. But this week, we have a bearish stock in a sector we haven't seen to much in our Five Big Bears Ready To Roar column.

Don't Be Chicken
Chicken producer Pilgrim's Pride's shares fell to $19.77 yesterday, to close about 9% lower than Friday's close the week before. This comes at the end of a steady week-long decline, along with news that one of its largest competitors would have to destroy 15,000 hens after testing positive with bird-flu. It seems the market may assume that if it could happen to one producer, it could just as easily happen to any of them.

The decline on Monday, comes as a BMO Capital Markets analyst said the chicken production cuts Pilgrim was planning will not be enough to protect its margins and profits. This reduction in production is a bid by many smaller chicken producers to decrease supply, and increase the cost of chicken to help offset the rising feed prices that have afflicted producers world wide. Soybeans and corn, which make up the chicken's feed, have seen ever increasing costs in the commodity market. The BMO analyst felt that the reduction in production will not be enough to mitigate this sustained spread between chicken prices and feed costs. (For more on analyst expectations, read Analyst Forecasts Spell Disaster For Some Stocks.)

I must agree with the analyst in this situation, in that collaberating with other producers in a psuedo-cartel in attempt to influence chicken prices will not be enough to regain control over the bottom line. In my opinion, a better action may be a campaign to promote its product across the country, in restaurants and homes. This increase in demand, could very realistically match the increase in demand that has been seen in food commodities that is the culprit for the increase in the producer's expenses. (For more on the supply and demand relationship, check out our Economics Basics tutorial.)

Until I see the spread between feed and chicken prices narrow (as will be seen by better margins), I am steering clear of this sector. With a gross margin of only 6% when compared to the industry's average of around 20%, Pilgrim's Pride has a long way to come to just match its competitors - who aren't in a great position themselves. With negative earnings, and low revenue growth, Pilgrim's Pride has most likely not seen the worst of its troubles yet.

Add Your Two Cents
What do you think will happen with Pilgrim's Pride going forward? Will the decrease in production, start an increase in chicken prices that will help producers offset rising feed prices? Would the better answer be to attack it from the demand side, and promote the use of chicken over beef and pork in U.S. restaurants and homes? Be sure to join me (aytonmm) in the Free Stock Picking Community to share your thoughts and see what other investors are saying.

By Ayton MacEachern

Ayton MacEachern is an Equity Trader, previously working as the Senior Financial Editor at Investopedia.com. After receiving his bachelor's degree in financial services from Mount Royal College in Calgary, Alberta, MacEachern began his career at an international securities trading firm. MacEachern has worked in a variety of roles in the financial industry, including workers' compensation insurance underwriting, financial planning, and equity, currency and options trading. MacEachern is also Co-Founder of theskipper.ca, a source for online outdoor education.

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