Merciless.
That’s the only word I can use to describe the market. Disappoint it, and you will pay the price.
Case-in-point: Mining equipment maker Joy Global (JOYG). Seems that one of this summers’ darlings is now a stock market pariah. Shares dropped a staggering 18% on Thursday.
The company earned $1.03 per share in Q3 but when a $0.22 foreign-tax credit is factored out of the equation, earnings came in $0.07 shy of analyst estimates of $0.88 per share. Sure, revenue rose 45% to $903.8 billion, but operating margins fell considerably at its surface machinery business.
Joy Global also lowered its tax rate to between 31–33% from 33–34% but the full-year earnings guidance it offered of $3.37 to $3.52 per share disappointed analysts. They implied operating income was less than previously forecast.
Why Cramer Jumped for JoyEarlier this summer Joy Global’s shares hit a high of $90 per share, and even got a “buy, buy, buy!” from noted television regular Jim Cramer.
It seemed at the time insatiable demand from the BRIC countries for coal and steel and new uses for coal here at home would lead to increased orders, revenues and earnings for the foreseeable future (see also, “Cashing In on Coal Stocks“).
Alas, slowing economies in Europe, China, and in the U.S. (not to mention fierce opposition to coal from the green lobby and higher input costs) have conspired against Joy Global as well as its chief competitor, Bucyrus (BUCY) which was also down this week.
I’ve discussed the danger of owning bubble stocks in the past. JOYG enjoyed a powerful ride higher as a result of a massive move in commodity prices. The trouble for investors is determining what is real and what is not (see also, “Exxon Mobil (XOM) Big Oil’s Big Demise“).
In this case, it’s true that global demand for raw materials is growing. It is also true that at some price, demand will falter. It would appear that we might have met that threshold over the summer.
It is too simplistic to say that foreign demand will continue no matter what the price. The concept of decoupling is taking some serious blows here. With the slowdown in the U.S., suddenly demand for foreign products drops.
A lack of buying in the U.S. puts a big break on foreign activity making it difficult for those companies to continue growing at a breakneck pace. That fact filters throughout the entire global economy.
The result is lower commodity prices and less demand for products from JOYG. One can’t help to want to be a contrarian with these stocks, but current headwinds suggest a better entry point can be had at a later time.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.
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