How to Profit From Nuance's Crash

NEW YORK ( TheStreet) -- Tuesday's trading session left more than one Nuance Communications ( NUAN) investor wondering if the bottom would ever arrive after the company that makes voice-recoginition software issued a disappointing outlook for its fiscal first quarter and 2014 on Monday.

The market typically requires at least one more and often two days to digest such bad news, presenting a buying opportunity known by Wall Street as a "gap-and-crap" event, which is a gap lower followed by continued selling.

Although obviously we can't predict the future, after studying earnings and outlook disappointments over the years, I don't get surprised often. Let's first examine what the heck happened to start the free-fall and discuss quick trade and long-term investment ideas.

If you haven't read TheStreet's Herb Greenberg's post earnings analysis, take the time to do so. It's well done and sums up why investors couldn't dump their shares fast enough, especially in the first hour Tuesday.

BlackBerry (BBRY) uses Nuance's software, and its announcement that it is withdrawing from handsets and laying people off doesn't help. That news, however, was already reflected in Nuance's stock price.

Apple (AAPL) is an unknown that has the potential to drive Nuance's revenue, but even if it does, Nuance's stock may not benefit much because it is already priced for high growth with a price to earnings-to-growth ratio of almost four.

The same applies for mobile in general as mobile is a popular buzzword these days. If a company is able to report mobile is growing, investors are willing to overlook almost any other issue. But you should be careful. 

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