Understanding Laggards in the Stock Market
Key Takeaways
- Performance Comparison: Laggards are characterized by their underperformance relative to sector benchmarks or peers.
- Investment Decisions: Typically first on the chopping block for removal from portfolios, laggards are considered risky holdings unless a turnaround is projected.
- Market Perception: Often tempting as ‘bargains’, laggard stocks may carry hidden risks outweighing their low cost.
Exploring the Concept of Laggards
Investors use the term ’laggard’ to identify stocks, companies, or sectors that trail behind their contemporaries in terms of performance. This drag can be the result of various internal issues—from loss of key contracts to management upheavals or competitive disadvantages. For instance, a stock like ABC with a perennial 2% return in a sector averaging 5% is a classic stock market laggard.
Owning laggard stocks can be costly, essentially leaving money on the table which could otherwise be generated by more robust investments. Investors must evaluate whether the persistence of holding such assets, in anticipation of a potential catalyst, justifies the ongoing opportunity cost.
Risks of Investing in Laggard Stocks
Laggards often signal underlying problems such as consistent underperformance in earnings or weak fundamentals. Furthermore, their low pricing often correlates with higher risk due to less liquidity and wider trading spreads—a true speculative venture.
While the allure of a low-priced ‘bargain’ stock is tempting, it’s crucial to discern between genuine value and a value trap. Commonly, stocks priced at bargain basement levels reflect inherent issues or limited growth potential, contrary to their more expensive, yet proven, peers. Therefore, savvy investors are inclined to select stocks with stable earnings, reasonable liquidity, and a minimum share price that attracts institutional interest—criteria typically eschewing traditional laggards.
Related Terms
- Leader: Stocks or companies that consistently outperform market averages.
- Value Trap: An investment that appears cheap but has underlying problems that may hinder future performance.
- Turnaround Stock: Stocks that have potential for recovery after a period of underperformance.
Suggested Books for Further Studies
- The Intelligent Investor by Benjamin Graham - A foundational text in value investing with principles to distinguish genuine investment opportunities from potential market traps.
- Common Stocks and Uncommon Profits by Philip Fisher - Insights into identifying long-term growth stocks, contrasting with typical laggard characteristics.
Investor takeaway: Scrutinize the allure of laggards meticulously, as the true cost of a bargain might be more substantial than apparent, warranting a strategy prioritizing established, rising stocks for sustained gains. Keep an eye on fundamentals and market position to navigate away from the seductive but often misleading appeal of underperforming stocks.
