The unfortunate reality of investing is that one day you could wake up and see your stock down 30% just like that. This is what happened to holders of Nutrisystem (NTRI) on Friday as the company forecasted sharply lower earnings for the full year. Could you have seen it coming from the chart?
What Happened?
Nutrisystem foresees lower sales and earnings due to its competitor Weight Watchers (WTW) launched its new PointsPlus system which increased its membership and hurt Nutrisystem. The CEO summed things up with a candid statement: “Longer term, it is clear that we need new product offerings and new sales channels to re-energize top-line growth.” Usually executives paint optimistic pictures, but there is no sugar-coating this disaster.
From Cheap To Expensive
Nutrisystem is a great example of how a stock can go from cheap to expensive in one fell swoop if it lowers guidance. Forward p/e ratios are only as good as the forecasted estimates they are based on. Investors will crush a stock if a company dramatically reduces guidance, which basically makes the stock more expensive on expected earnings. Management guided 2011 earnings down to between 40 and 50 cents per share which is way below the consensus of $1.30 per share.
The Chart
Technicians pride themselves on being able to foresee problems before they occur. Unfortunately there isn’t much that I see in the chart that could have been a big warning. It is by no means a pretty chart, but it is actually rising from a bulling “bowl” basing formation and then spiked up on decent volume in mid-February. The price was also being supported by its 50 and 200 day moving averages, so it’s my opinion that this plunge was not evident in the charts. Nobody said buying high-beta stocks was without significant risks.
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