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
Fortune's Former Rank
Stock Price When Last on the List
Stock Price in 2012
Missed out the opportunity of mobile Internet
After a string of bad loans bank failed and taken over by FDIC in 2009
Big bets on natural gas turn sour as supply outstrips demand
A split of CD rental business from the streaming business and a price boost resulted in subscriber losses
High risk investments in oil and gas exploration turn sour
Company failed top adjust swiftly to a world economic slow-down
Research in Motion (BBRY)
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.
Additional disclosure: Long on GLW