Fallen Angel

A stock that was once a market favorite but has lost the market’s favor and hence fallen a lot from its record high price.

Due to the irrational exuberance in a bull market, many stocks that have extremely poor fundamentals(such as low revenues, no income, extremely high debt ratios) become extremely overvalued(using traditional benchmarks as a guide) and are decimated in a bear market. These are usually one-time market favorites, such as the dotcoms circa 2000 and many never appear in the public favor again.

However, some companies do successfully manage to turn around. The key is whether or not the company has a successful business model and a strategy that it can execute. Many large cap companies were ridiculed as “Old Economy” in 1999 but performed very well in the ensuing bear market.

While it is possible for a fallen angel to recover, the risks are clear and an aspiring investor should do adequate amounts of research before buying into one these situations, which may turn out to be nothing but castles in the sky.