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How Many Times Can A Fallen Angel Rise?

As a rule, none."Falling angels," popular stocks that have fallen out of favor among the momentum crowd, rarely rise to the old highs.

Telecommunications and networking stocks like Cisco Systems (CSCO), Ciena Corp (CIEN), JDS Uniphase (JDSU), Corning (GLW), and Alcatel-Lucent (ALU) are a case in point: they all trade at a fraction of their 2001 highs. Chinese Internet and social media stocks like Youku.com Inc. (YOKU), E-Commerce China Dangdang Inc. (DANG), and Renren Inc (RENN) are also another case in point: they all trade at a fraction of the price at which they went public a few years ago.

What can explain this pattern? A slow-down in corporate growth that took the hype off these stocks.

To test this hypothesis, we took a close look at seven stocks included in Fortune's high growth company list for the years 2005 and 2006, which eventually were removed. In all cases, a decline in corporate growth was followed by a sharp decline in the stock price, with two companies eventually going under.

There was on notable exception -- Netflix (NFLX). The company reached new highs, though its revenue growth never re-accelerated. What can explain this anomaly?

Falling From Grace: Fortune's 7 Former Fastest-Growing Companies

Company

Fortune's Former Rank

Stock Price When Last on the List

Stock Price in 2012

Explanation

Yahoo

1

$40

$18

Missed out the opportunity of mobile Internet

Vineyard National

4

--

--

After a string of bad loans bank failed and taken over by FDIC in 2009

Chesapeake Energy

46

32

17

Big bets on natural gas turn sour as supply outstrips demand

Netflix

18

35

55

A split of CD rental business from the streaming business and a price boost resulted in subscriber losses

Edge Petroleum

8

--

--

High risk investments in oil and gas exploration turn sour

United Steel

44

58

18

Company failed top adjust swiftly to a world economic slow-down

Research in Motion (BBRY)

1

120

12

Failed to catch up with Apple in the Smartphone and tablet markets

Investors seem to focus on subscription growth rather than revenue growth, still hyped by the company's prospects. We don't believe the prospects are that bright, as we discussed in a previous piece. That's why investors should be careful trading the stock on both sides of the market.

Source: How Many Times Can A Fallen Angel Rise?

Additional disclosure: Long on GLW