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Is It Time to Buy the Nasdaq's 4 Worst-Performing October Stocks?

Motley Fool - Wed Nov 8, 2023

Holding out for a lower price on a purchase can make good sense... even when you're buying a stock. After all, why pay more when you don't have to?

Just because a stock's taken a tumble, however, doesn't necessarily mean it's worth buying on that dip. Sometimes a stock's down for good reason, and perhaps more declines are in store.

Consider, for example, the Nasdaq's worst-performing stocks of October. They might merit consideration as investments at their now lower prices. Or, they might be train wrecks.

Why they're down

Shares of Lattice Semiconductor(NASDAQ: LSCC) lost 35.3% of their value last month as part of a more sweeping sell-off among some -- but not all -- chip stocks. ON Semiconductor fell 32.6% in October, almost qualifying it for a spot among the Nasdaq exchange's worst performers.

Blame Lattice's guidance for the quarter now underway, mostly. While the third-quarter results it posted late last month topped estimates thanks to sales and earnings growth, the chipmaker only expects Q4 revenue of between $166 million and $186 million, compared to analysts' consensus estimate of nearly $196 million.

Investors may have sensed a lackluster outlook was in the cards, which would explain the shares' slow, grinding decline last month. ON Semiconductor issued similarly weak guidance after delivering respectable third-quarter numbers. While the bulk of ON's headwinds stem from a slowdown of the EV market's growth, it was a red flag nonetheless.

Align Technology(NASDAQ: ALGN) fared even worse than Lattice. Shares of the maker of Invisalign teeth-straightening aligners lost 39.5% in October, with the bulk of that decline coming on the day after it posted its third-quarter numbers. Sales of $960 million fell short of analysts' expectations for nearly $995 million, and earnings of $2.14 per share missed expectations for $2.26 per share. Management's sales guidance for the quarter now underway was also disappointing.

SolarEdge Technologies(NASDAQ: SEDG) took a tumble of 41.4%. Its weakness extended what has become a long sell-off period for it and rival Enphase Energy, which was down a hefty 33.8% itself in October.

What gives? In simplest terms, demand for solar power systems isn't quite what it was expected to be at this point. Underscoring the disappointment is SolarEdge's revenue outlook for the current quarter. The company's now calling for a top line of somewhere between $300 million and $350 million compared to analysts' average prediction of nearly $688 million.

Last but certainly not least, biopharma stock Sarepta Therapeutics(NASDAQ: SRPT) lost 44.5% of its value last month, with most of the setback coming on the last day of October. The steep sell-off followed news that its gene therapy drug Elevidys didn't perform as well as hoped as a treatment for Duchenne muscular dystrophy among children ages 4 to 7. Although Elevidys proved at least somewhat beneficial in the trial (and is already approved for certain groups of Duchenne muscular dystrophy patients), the most recent round of testing of the drug was one investors clearly had high hopes for.

SRPT Chart

SRPT data by YCharts.

The question remains though: Which -- if any -- of these four Nasdaq-listed stocks are a buy now that they're down so much?

Any good answer to the question requires a brief philosophical discussion.

The rest of the story

The premise of the bargain-hunting strategy is sound. That is, in a normal environment you should buy a stock you like while its price is low.

Sharp news-driven plunges of story stocks, though, are anything but normal. They often follow meteoric rallies, or are part of much bigger sell-offs that have taken on lives of their own. Such weakness can persist, making it difficult to know if a stock has already reached the bottom of its trough. Never even mind how tough it can be to determine if you genuinely like a particular company's prospects or if you're simply enamored by the hype, and afraid of missing out.

It's times like these when it's imperative you remember to take every potential stock pick on a case-by-case basis, regardless of its recent performance.

Take Sarepta Therapeutics as an example. Sure, the results from its most recent trial of Elevidys are disappointing. Take a step back and look at the bigger picture, though. The trial in question was only looking at a small sliver of the Duchenne muscular dystrophy market, and even within that small set of patients, the company feels the drug could still be beneficial for some of them. Meanwhile, the drug is already approved for other indications, with even more being studied. In the meantime, Sarepta's three other approved drugs produced the bulk of last quarter's companywide sales of $332 million, well up from the year-ago comparison of $230 million.

Read between the lines: There's no additional risk here that didn't exist a month ago, and not a lot less opportunity either. The biggest risk here is just the possibility that too many investors will remain too fixated on Elevidys's recent trial results. For risk-tolerant investors, however, Sarepta's big dip has created an interesting opportunity, even if the stock might not be a great fit for everyone's portfolio.

The same can't quite be said for Align Technology.

As most investors who've been following this company's story in recent years can tell you, the expiration of patents protecting Invisalign's clear dental aligners has given rise to lots of competition. The market is now saturated with rivals, driving the prices for clear aligners lower. Given all that, Align Technology has actually held up surprisingly well. And, as the leading brand in its niche, it will survive.

However, it no longer has a meaningful competitive edge in what's become a commodity market. The stock market is still coming to terms with this reality, which should continue working against the stock.

As for Lattice Semiconductor, its foreseeable future seemingly looks grim. The headwinds it's facing may not be as troubling as they seem on the surface, however.

See, its core products are field programmable gate arrays (FPGAs), which are relatively simple chips and chipsets that can be programmed by the customer that is embedding them into its products. These tend to sell reasonably well even when more advanced hardware like computer processors and data center equipment face slacking demand due to corporate budget cuts or consumers tightening their purse strings. Mordor Intelligence expects the global FPGA market will grow at an annualized pace of more than 10% at least through 2028. And analysts still anticipate top-line growth of 13% for Lattice next year, with per-share earnings projected to grow in line with those sales.

Finally, SolarEdge Technologies' situation is tricky, to say the least.

Much of this year's weakness from SolarEdge stock stems from the complex economic environment and the expiration of certain tax incentives for purchasing solar power systems (particularly in California). After all, they can be expensive, and often come with major upfront costs.

Many such incentives are now being extended and restored, however, raising the near-term hopes for the solar industry.

And either way, residential as well as utility-scale solar power will be a key component of the nation's energy future. The U.S. Energy Information Administration believes most of this country's power production capacity growth between now and 2050 will come from renewable sources, with more than half of that growth coming from solar. The same basic dynamic applies everywhere else, and all of it is being driven in part by the ongoing reduction in solar's cost.

So SolarEdge Technologies has tons of opportunity ahead. The stock's recent sell-off provides a better entry point for long-term investors to plug into this megatrend.

Then there's the bigger-picture lesson to embrace here: The list of one month's biggest losers might be a great place to start your search for new stock picks. That's not where your homework ends though. There's always more to the story, and all of it matters in assessing a company's future prospects.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Align Technology and Enphase Energy. The Motley Fool recommends ON Semiconductor and SolarEdge Technologies. The Motley Fool has a disclosure policy.

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