5 Tips to Avoid "Dead $" Stocks
Owning a “dead money” stock can frustrate investors as these stocks often plateau and fail to regain their previous highs for extended periods, or sometimes never at all. For example, it took Microsoft (MSFT) more than 15 years to recapture its all-time highs after the internet bubble burst in 2000.
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Such stagnation can result from various factors, including changes in market dynamics, shifts in industry trends, or internal company challenges. Investors who bought the stock at a high price may find themselves waiting for considerable time to break even or turn a profit on the stock. However, by waiting for the stock to turn around, these investors often fail to understand the opportunity costs involved with waiting around in a stagnant stock.
To take the step from amateur to professional, investors must be able to identify a stagnant stock and be able to pivot. Sitting in a dead money stock leads to financial issues, and more importantly, a psychological toll of watching other stocks flourish while one’s investment remains stagnant. This increased frustration and disappointment can spark a ripple effect that causes mistakes throughout a portfolio. The importance of ongoing evaluation of investment choices to avoid being stuck with dead money stocks can not be overstated. Below are five tips to avoid dead money stocks, including:
Consult a Chart
The easiest and most straightforward method to identify a stagnant stock is to look at a chart. Just as a doctor must consult an x-ray, investors should consult a chart before investing, regardless of how fundamentally focused they may be. First, look at the long-term 200-day moving average; if it is flat, or worse, pointed downward, the trend is not in your favor. For example, Coca-Cola (KO) saw its 200-day moving average turn flat in late 2022. Since then, the stock has been chopping around in a frustrating consolidation.
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Another blatant sign of danger ahead is relative weakness. The ARK Innovation ETF (ARKK) gave an early warning shot when it topped nearly a year before the S&P 500 Index.
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Avoid Slow Growth Dividend Payers
If a company has not grown earnings for years and pays a dividend, it could be a warning sign or a red flag. When growth slows, a company may pay a reward in the form of a dividend to help keep investors interested. These stocks are often viewed as stable and financially sound, but they often lack price momentum and excitement.
Avoid Old Economy/Caretaker Management Names
All else equal, earnings growth is the primary driver of stocks in the long term. Often, companies within the Dow Jones Industrial ETF (DIA) are already well-established industry juggernauts. After reaching success, these companies focus on maintaining the status quo rather than generating new earnings. In fact, over the past decade, the S&P 500 Index has outperformed the Dow by nearly 60%.
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Seek Innovation
Innovators such as Tesla (TSLA) tend to generate faster earnings growth, and thus, better price trends. Since 2015, TSLA has a CAGR of 42% and has soared more than 2,000%.
Understand the Market Environment
The market environment is the most important factor determining a stock’s action. In bull markets, high valuation and growth issues outperform. Conversely, in bear markets, these names dramatically underperform. Shopify (SHOP) is a good example – the stock fell from $175 to $50 after the post-pandemic rally sputtered out. Before the collapse, Shop’s price-to-sales (p/s) ratio was a sky-high 60x.
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See This Stock Now for Free >>Microsoft Corporation (MSFT) : Free Stock Analysis Report
CocaCola Company (The) (KO) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
Shopify Inc. (SHOP) : Free Stock Analysis Report
ARK Innovation ETF (ARKK): ETF Research Reports
