However, it was when the company announced second quarter earnings in November that the trouble started in earnest. The next big problem came in late February when the company announced a second earnings shortfall and also announced that an accounting mistake had led to an overstatement of the aforementioned second quarter earnings. The company's products include burglar alarms and motion and fire detectors. It also makes the equipment for the sensors to transmit signals. The company believes it is in the top five of security equipment makers.
Earnings surprises are just that, surprises.
It is difficulty to see how an investor could have predicted the earnings shortfall. However, a prudent investor might have been on the sidelines based on valuation. After the earnings surprise an investor could have still escaped with a modest loss by selling after the initial drop. One negative surprise is often followed by another, as Detection Systems nicely illustrates. It is situations such as this where valuation really matters.