What Is a Laggard?
A laggard is a stock or security that underperforms relative to its benchmark or peers. Laggards exhibit lower-than-average returns when compared to the market. They stand in contrast to leaders, which outperform their benchmarks.
Key Takeaways
- Laggards underperform in terms of investment returns when compared to their benchmarks.
- Portfolios containing laggards may see these investments as the first candidates for selling.
- Misidentifying a laggard as a bargain can lead to excess risk.
Clarifying the Concept of Laggards
Often referring to a stock, the term ’laggard’ can also describe companies or individuals consistently underperforming compared to peers. In investment jargon, investors avoid laggards as these stocks tend to achieve less-than-desired rates of return. For example, consider stock ABC which posts an annual return of only 2% while other industry stocks yield 5% on average. Clearly, stock ABC is a laggard.
If your portfolio has laggards, these should be at the top of your sell list. Holding a stock that returns only 2%, while another in the same category returns 5%, basically costs you 3% each year. Unless there is a robust reason pointing to a potential turnaround, holding onto a laggard equates to financial drain. Usually, company-specific issues like lost contracts, management turmoil, or earnings erosion in a competitive landscape can drag stock performance into the ’laggard’ territory.
The Risks of Investing in Laggard Stocks
Why does a stock become a laggard? Repeated failures in meeting earnings or sales estimates, weak fundamentals, or thin trading liquidity can mark a stock as a laggard. While a lower-priced stock might seem like a bargain, it could turn out to be a costly risk if it continues to underperform.
Everyone prefers bargains, but cheap stocks may not correspond to lucrative investments. A $2, $5, or $10 stock might appear to have high growth potential. However, stocks under $10 often have inherent deficits, either historical or current.
A prudent strategy could be investing in fewer shares of a robust stock rather than thousands in a cheap one. Top mutual funds and major investors are generally drawn to companies with strong earnings, have traded at least $15 on the Nasdaq or $20 on the NYSE, and sustain daily trading volumes of at least 400,000 shares. This ensures smoother trading with minimal impact on share prices.
By focusing on institutional-quality stocks, you can strike a balance between investing in growth and managing risks effectively.
Related Terms: stock performance, investment risk, portfolio strategy, stock trading.
