3 Lessons From Today's Plunging Stocks

By Markets Fool.com


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Stocks lost ground on Wednesday, as nervous investors worried about the near-evaporation of economic growth in the U.S. during the first quarter and the implications for monetary policy as the Federal Reserve meets to announce its next steps later today. As of 11:35 a.m. EDT, the Dow Jones Industrials were off about 75 points, with other market benchmarks facing similar losses. Yet significant declines in several big-name companies point to some challenges stock investors face in dealing with a market that has moved nearly straight up for years. Let's look at a few investing lessons that today's big losers can offer about managing your stock portfolio.

1. Growth isn't always enough.
By all accounts, Twitter has been growing quickly, and yesterday afternoon's results showed the business has continued to gain traction in many areas. Revenue jumped by almost three-quarters in just the past year, and the company jump-started its active-user counts, with more than 300 million people using Twitter regularly and contributing to $46.5 million in adjusted net income for the quarter. Yet the stock plunged 18% yesterday after the early release of the results, and Twitter shares dropped another 5.8% today as growth-focused investors weren't satisfied with the pace of the social-media company's gains in revenue.

Image: Twitter.

The lesson here is that a stock's price already accounts for expectations about future growth. As a result, paying too much for a stock can be disastrous even if the company does reasonably well -- because investors might have even higher expectations the company simply can't meet.

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2. Don't mess with dividends.
In a low interest rate environment, investors have looked at dividend stocks as one of the last ways to gain reliable income. When companies cut dividends, the resulting disappointment can be punishing.

Wynn Resorts learned that lesson the hard way yesterday afternoon when it slashed its quarterly dividend payout by two-thirds. Few investors were surprised by the casino giant's accompanying earnings report, which showed just how much the sluggish activity in the Asian gaming capital of Macau has hurt Wynn's overall results. Yet many expected Wynn to borrow money to sustain its dividend, which it had just raised the previous quarter.

For long-term investors, conserving cash to promote growth might actually be smart, given Wynn's development plans over the next several years. But with Wynn sinking 16% today, few shareholders are focusing on those long-term plans.

3. Watch out for rising costs.
For years, inflation has been almost nonexistent, helping boost companies' profit margins. For some, though, higher costs have big implications for profitability, and surprises can result in big problems for companies.

Image: Buffalo Wild Wings.

Buffalo Wild Wings fell 14% today after the sports bar company released its latest earnings report last night. Although profits edged up from the year-ago quarter, they didn't rise nearly as much as investors had expected, largely due to prices of the restaurant chain's well-known chicken wings. Overall, chicken wing prices soared more than 40%, contributing to an overall rise in restaurant cost-of-sales of almost 30% from the same period in 2014. When businesses that are exposed to commodity prices face inflation, they have the unattractive dilemma of either trying to pass on higher expenses to customers or eating those costs and seeing their margins decline.

Even with a healthy stock market, most companies face big potential threats. These three lessons should give you an idea of what to look for as you study your portfolio to identify possible future pitfalls that could cost you some of your hard-earned investment gains.

The article 3 Lessons From Today's Plunging Stocks originally appeared on Fool.com.

Dan Caplinger owns shares of Wynn Resorts, Limited. The Motley Fool recommends Buffalo Wild Wings and Twitter. The Motley Fool owns shares of Buffalo Wild Wings and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.