Dear long-term investor, investing in fallen stocks can work out well in the long run. At least, provided we invest in good companies with potential. In the short term, fallen shares feel embarrassing. Often the beating, we feel, goes on endlessly. Every negative news item is used to further undermine the fallen share. As if the market knows that we own this share (but it does not...).
Yet it is true that in some cases companies are unfairly punished. The beating starts for good reasons, but then fear strikes.
No one knows exactly where the bottom of fallen stocks lies. As a long-term investor, "buy the dip" can be an excellent technique. Make sure that your portfolio is balanced with shares that do have strong momentum. These stocks perform better on average. And the shares that have fallen? Here we should look for unique buying opportunities that can perform exceptionally well.
Below are five beaten stocks with potential and purely for inspiration. Please note that this is not a buy recommendation.
Fallen Stocks 1. Teladoc Health (TDOC)
Teladoc Health (TDOC) is the first of the bagged stocks. We think this stock is performing remarkably. It is notable that the share price began to rise sharply before the outbreak of the corona crisis. The covid-19 stock crash barely impacted its share price. And from 2021 to January 2022, the share price is down by -62%. This is even -73% (!) from its all-time high.
So we see how extreme a stock price can move. At its all-time high in February 2021, TDOC was very overvalued. A classic expression of euphoria. But in early 2022, its stock is lower than it was in 2019, while the company is growing rapidly.
What's going on here?
Teladoc Health is a separate story. This requires in-depth analysis and this article is too limited for that. In summary, we see that: TDOC is growing fast within a growing market. The company is also spending a lot of money. It has been loss-making for years. Also, the growth was partly bought with the acquisition of Livongo. The fear that investors have is whether Teladoc Health will ever become profitable at all.
We ourselves have no shares in TDOC. In our opinion, it is still a bit too much speculation. But if the share price falls further, the offer will become very interesting. The company is growing by 30 - 50% per year (sales) while its valuation is more favorable than the sector average (EV/S 7.67, P/S 6.56, P/B 0.82).
The problem with TDOC is that it is making too many losses. Cash flow ratios are unfavorable. Still, we see this as one of the most fallen stocks with potential. A long-term investment of 5+ years could prove to be lucrative.
Nobody said that investing in stocks is that easy.
Fallen Stocks 2. StoneCo (STNE)
StoneCo (STNE) also falls under fallen stocks with potential in our opinion. The stock is down -82% from its all-time high. But it is also down -60% relative to its early 2020s. Now, where TDOC is mainly benefiting from the covid-19 crisis, StoneCo's business is partly affected by it.
A series of fixe setbacks, both internal and external, has led to a historic price drop. To summarize: large losses on investments in Banco Inter, discontinuation of its credit business, unfavorable Brazilian economy, and sell-off of growth stocks.
It is always difficult to decide when to buy. Especially when it looks like a company is heading straight for the abyss.
There are many "ifs" and "buts" at StoneCo. However, if we look at the results, we see a rapidly growing core business in (1) customer base and (2) revenue. In doing so, StoneCo has demonstrated in the past its ability to achieve high-profit margins. The internal struggles do not seem to be permanent. It is up to management to improve here. And if that succeeds, together with a more favorable economic climate, StoneCo could be a lucrative investment in the long term.
We have included StoneCo in our portfolio because we expect this fallen share to have been overpriced. The punishment began even before the market for growth stocks became bearish. And rightly so. The results were surprisingly poor. But now it is one of the most depressed stocks of the moment. In our view, this is not justified. Here lies an opportunity for long-term investors.
Disclaimer: we have a small position of 0.5% in STONE for the long term (no buy recommendation).
Fallen Stocks 3. DocuSign (DOCU)
The last risky growth stock to fall under the fallen stocks is DocuSign (DOCU). Unlike TDOC and STNE, DocuSign still stands at +72.8% vs. early 2020. Recently, the stock price was punished by -57% in response to less-favorable future expectations. This was a statement by the CEO. The same CEO bought $4.8 million and $5 million worth of shares in December 2021 and January 2022, respectively, after the price drop. Apparently, he disagrees with the beating and sees long-term potential for his company.
We are less enamored with DocuSign, as we do not consider it a superior company. However, it does have some interesting advantages, such as its subscription model and a growing market. This fallen stock could be interesting if it drops to the 2020 level.
Fallen Stocks 4. Alibaba (BABA)
We will now look at two fallen stocks that have a proven earnings model. After all, TDOC, STNE and DOCU are punished stocks with potential. But they fall under growth stocks. And growth stocks are, by definition, of high risk. Now I've had a lot of success with growth stocks in the past, but now the ship really does seem to be turning (i.e. inflation and interest rate policy). I'm sticking with growth, but my focus is now shifting heavily to more value.
Alibaba is one of the fallen stocks that stands out. Frankly, I'm not sure if Alibaba is a Value stock or not. I hear many value investors assume it is. However, there are still serious risks with this company. It is true that it is still growing strongly in annual sales. And the current profitability in margins is fine. But in our view, the danger lies in its future earnings growth. And of course, that has everything to do with the political policies from China.
Interesting sagging stock with potential, but we remain on the sidelines. Tip: instead of one technology company from China, you can also invest in several through an ETF. Or look for affiliated downgraded stocks that have been unfairly punished because of their associations with China. Example: Prosus (PRX).
Fallen Stocks 5. Walt Disney Company (DIS)
Walt Disney Company (DIS) is the last of these 5 fallen stocks with potential. Everyone knows this unique company. Unfortunately, it has been greatly affected by the corona crisis. Its world-famous parks, which are truly gold mines, have been and are being hit hard. Yet this seems to be a temporary phenomenon. And in the meantime, this wonderful company continues to expand its business with digital initiatives.
As far as we are concerned, this is a good long-term investment. Any short-term decline, for example because of increasing covid-19 restrictions, would in our view be beneficial for the future.
Where to buy fallen shares?
We buy fallen shares on well-known investment platforms. More recently we are delving into the European broker called Freedom24. They offer a larger range of stock markets compared to most other brokers. And interesting is its unique service regarding buying new stocks at IPO price.
Interesting: Freedom24 is also publicly traded. Its parent company Freedom Holding (FRHC) has risen +44.460% in five years (this is not a typo). And even today, it still has strong growth. But how exactly this is achieved is not entirely clear to us. Whether its shares are a good long-term investment we also do not know. For this, we have done too little research.
Want to know more about Freedom24 and buying new stocks at IPO price? Click here for more information.
Disclaimer: "Investments in securities and other financial instruments always involve the risk of loss of your capital. The forecasts and past performance are not reliable indicators of future performance. It is essential to do your own analysis before making any investment. If needed, you should carefully seek independent investment advice from a certified professional. Buying stocks at IPO prices may involve additional restrictions.")