There are a lot of adjectives that I would like to use to describe my money. "Awe-inspiring" would be great. "Plentiful" would help me sleep well at night. "Vivacious" would be odd, but I'd take that as well.
I would, however, be pretty bummed to hear my money be referred to as "dead money."
But apparently there is a serious risk of money dying from investing:
- InvestorPlace just tagged Microsoft
(Nasdaq: MSFT) - Herb Greenberg at CNBC labeled Target
(NYSE: TGT) - A recent blog post that appeared on SeekingAlpha listed five supposedly "dead money" tech stocks. That list included Microsoft as well as Intel
(Nasdaq: INTC) (Nasdaq: CSCO) (NYSE: HPQ) (Nasdaq: AAPL) - Finally, a video on Yahoo! Finance's Breakout had a commentator calling all of the big banks and brokers -- think Goldman Sachs and Citigroup
(NYSE: C)
I don't want my money to die a painful, stock-induced death, so I think we better take a closer look at this "dead money" issue.
A starting point
Though Merriam-Webster defines "dead" and "money" (and "dead in the water," "dead center," and "on the money"), it doesn't come up with anything for "dead money." Thankfully, Investopedia gives us a starting point:
A slang term for money invested in a security with minor hopes of appreciation or earning a return. The stock may also be referred [to] as dead money by analysts, as a warning to investors who might purchase the shares.
In other words, it sounds like a "dead money stock" is simply one that's not expected to go up. That definitely sounds like something I'd like to avoid.
Danger, Will Robinson!
Of course while there might be a case to be made for any stock not going up, when the phrase "dead money" is thrown around it typically is talking about a stock that hasn't gone up in the past and therefore is expected to not go up in the future.
For instance, this is from the InvestorPlace article about Microsoft:
As I posted in June 2006, when Bill Gates retired as CEO, the stock had been dead money for the preceding five years -- falling from about $57 at the end of 1999 to $22. Since then its stock has stayed dead -- having risen to an unimpressive $24 -- a five year annual growth rate of 1.75%.
Or consider this from the Intel section of the SeekingAlpha piece:
The next company that fits nicely in this category is Intel, another strong company with solid profits over the past decade, but not a stock to brag about in one's portfolio. Intel traded around $30 a share in 2001 and is currently trading at $23 a share, a $7 a share loss for your investment in the company over this time period…
Granted, the obituaries of dead-money stocks do often involve other factors, but a central part of the discussion is almost always a history of poor stock performance.
Maybe I do want my money dead
The problem with focusing on stock performance in this way is that stock price is not always indicative of the performance of the underlying company. So to suggest that since a stock hasn't performed that it won't perform is… well, it's not a theory I'd like to put to work in my portfolio.
In fact, my view of the world is quite different, as many of these dead-money stocks are exactly the stocks that I either own or might like to own. And I think that this table goes a long way towards explaining why:
|
Company |
Average Price-to-Earnings Ratio 2000 |
Price-to-Earnings Ratio Now |
Average Annual Earnings Per Share Growth 2000-2010 |
|---|---|---|---|
| Microsoft | 46.7 | 9.8 | 9.5% |
| Intel | 47.2 | 10.5 | 2.9% |
| Target | 23.7 | 12.1 | 11.2% |
| Cisco | 173.2 | 12.7 | 14% |
| Hewlett-Packard | 37.1 | 9 | 7.9% |
Source: Capital IQ, a Standard & Poor's company.
There's a very simple story here. These companies have grown. In most cases, they have grown at a pretty commendable clip considering they were already large companies 10 years ago. However, all of these stocks were trading at pricey multiples back in 2000 -- in some cases insanely pricey.
Which leads me to the important part: The "dead money" appearance of these stocks has nothing to do with the future of the stock and everything to do with past overvaluations.
The upshot is that the lousy stock returns have pared down valuations to the point where they're almost undeniably attractive. And, frankly, the more that other investors want to label these stocks "dead money," the happier I get, because that may mean the opportunity to buy at even lower prices.
Past dead and future dead
What's crucial though is to take care to figure out which kind of "dead money" a writer is talking about. When there is a significant focus on the fact that the stock has been dead money, it's possible the stock is poised to be a money maker going forward.
However, be on the lookout for when the "dead money" label is strictly forward-looking. For instance, I could say that Apple will be dead money because it will inevitably end up with a product that isn't a home run and earnings will suffer (I'm not convinced of that, but I have my concerns). Or I could say that Citigroup will be dead money in the near term because of sluggish growth.
Turning back to Merriam-Webster, when something is dead it's "deprived of life" or "no longer producing or functioning." Luckily for value investors like me, a "dead money" stock often means nothing of the sort.
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