THE RATIONAL INVESTOR: The most speculative stocks continue to be poor investments

The first half of 2022 was a nightmare for speculative stocks as shown by their NASDAQ home. It significantly underperformed the S&P 500 and the U.S. Total Market Index. My not recommended and very risky “Living Dangerously Portfolio” had similar behavior.

Equity investors must cope with normal volatility, but they don’t have to deal with high volatility and high probability that a speculative stock’s price will collapse. However, like the lottery, speculative stocks will have some big winners. But few investors have the skill to find these “needles in the haystack” and the discipline to stick with them. Many investors are extremely sensitive to volatility, which these stocks tend to have, so investors panic and sell when a significant decline occurs.

A problem with speculative stocks is their prices are often based on the hope of outstanding far-future earnings, not the reality of their near-future ones. I label these stocks as “dangerous.” Since these stocks’ prices are based on hope, they’re literally “priced for perfection” and perfection is rarely achieved. For example, one of the most speculative of these are initial public offerings. A recent study reported that most investors in these lost money after five years.

I’ve warned readers about dozens of dangerous stocks. From time-to-time, I construct a “Living Dangerously Portfolio.” For 2020, I started a new portfolio with all the dangerous stocks reviewed from 2016-19, that are still publicly traded; three have gone bankrupt or private. I assumed a $10,000 investment in each at the price in the column when it was reviewed.

How has this portfolio of the remaining seven stocks done from their purchase dates, and for 2022?

The portfolio ended the first half at $69,231 down 1%, measured from the purchase date of each stock. It closed 2021 at $92,538. Thus, this year it lost 25.2% as compared to the 19.9% loss of the S&P 500 and the NASDAQ’s 29.5% loss. These results still overestimate the return because of the three stocks that are no longer traded or went bankrupt. Given their negative long-term returns, it should be clear that dangerous stocks may not be “great” investments. Since, the less speculative and volatile S&P 500 had a significantly better and positive long-term return, why take the risk?

Let’s review the stocks.

• In November 2016, Alarm.com Holdings (ALRM) was reviewed; its price was $29. Its closing first-half price was $61.86.

• In February 2017, Weibo (WB) was reviewed; its price was $54.39. Its closing first-half price was $23.13.

• In September 2017, AppFolio (APPF) was reviewed; its price was $45. Its closing first-half price was $90.64.

• In February 2018, TAL Education Group (TAL) was reviewed; its price was $32. Its closing first-half price was $4.87.

• In May 2018, Abiomed (ABMD) was reviewed; its price was $388. Its closing first-half price was $247.51.

• In September 2018, CareDx (CDNA) was reviewed; its price was $26. Its closing first-half price was $21.48.

• In February 2019, Tactile Systems Technology (TCMD) was reviewed; its price was $70. Its closing first-half price was $7.30.

All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at rsstepl@tampabay.rr.com. He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.

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