Why Did PC Connection (CNXN) Drop Nearly 30% Last Week?

It has been a challenging few weeks for the market.

Since its peak in late September, the S&P 500 (SPY) has now declined -5.5%. Over the same period, the Russell 2000 small cap index has suffered twice as much, declining -11.1% from its recent peak (now officially in “correction” territory).

Our Active Stock Investor portfolio has split the difference between the S&P 500 and the Russell 2000, declining -7.8% from its peak. Given the Russell 2000 is its closest benchmark (holding fellow small cap stocks), the ASI has held its ground fairly well against the recent decline.

On Thursday evening, PC Connection (CNXN) issued downside guidance for its upcoming Q3 earnings report, which will be released on November 1st. The company stated that they are expecting:

  • Revenue of $657M – $659M vs. $701M analyst consensus
  • EPS of $0.49-0.51 vs. $0.67 analyst consensus

Basically, PC Connection was warning investors that their Q3 performance was going to fall short.

The company’s CEO explained that most of the quarter had been strong, but towards the end of September they had “experienced lower than expected growth mainly from both our small- to medium-sized customers and our federal customers attributable to supply shortages, weakness in the healthcare sector and timing of shipments to customers.”

On Friday, the stock declined a whopping -27.7%, shedding a stunning $280M in market cap in a single day.

To be clear, we think it’s an overreaction to erase nearly one third of the company’s value because they had a weak end to their quarter. But it’s reflective of the current mood on Wall Street, which is harshly punishing growth companies that fall anywhere short of spectacular.

While PC Connection will likely return to its steady growth and its stock should recover, we’re not interested in holding the stock right now. There are other small cap stocks that would be a better place to invest your money.

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Author

Todd Lincoln

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Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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