The massive implosion of Finisar Corporation (FNSR) today is a fantastic example of why watching the leaders in any hot industry group is so vital to success. The ripple effect of FNSR posting weak guidance and subsequently shedding 38.5% was seen on every other major leader in its group.
Finisar’s stock has been on an incredible run the last four months. After its breakout through $21.50 on 12/2/10 the stock over doubled, peaking at $46.09 on 2/14/11. Earnings were released yesterday after the close and while earnings were in line, guidance was not. The stock is in a very hot group, Telecom Fiber Optics, and momentum has been the driving force.
Because of the earnings disappointment, all the peer stocks in this group took a licking. Weakness from a major leader usually spreads to the rest of the group, especially when that weakness is guidance for the future. Some of the major sufferers:
- J D S Uniphase (JDSU) down -12.3% to a close of $22.27.
- Oplink Communications (OPLK) down -15.6% to a close of $21.63.
- E X F O Inc (EXFO) down -9.3% to a close of $11.76.
- Oclaro (OCLR) down -18.6% to a close of $13.53.
Now, looking at FNSR specifically, due to its gap after hours, stops wouldn’t have saved you in this case. Having a sound strategy with specific rules on how to handle earnings (for example, trimming exposure) is the only strong prevention tool. I preach quite often to always know your stocks earnings dates, and this is a great example why.
Overall, failure to watch the leaders in any group you are invested in can be a haunting experience. Hot trend momentum stocks are more volatile and prone to reversals because of news or earnings. Keep it frosty out there!