Is This Stock Dead Money?

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  ) with the headline "Microsoft: Still Dead Money After All These Years."
  • Herb Greenberg at CNBC labeled Target (NYSE: TGT  ) a "dead money stock" back in April.
  • 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  ) , Cisco (Nasdaq: CSCO  ) , Hewlett-Packard (NYSE: HPQ  ) , and Apple (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  ) -- dead money.

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.

Want to keep a close watch on the vital signs of the companies above? Click the "+" sign next to any ticker to add it to your watchlist. Don't have a watchlist yet? Click here to start a new one (it's free!).

The Motley Fool owns shares of Apple and Microsoft. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Microsoft, Intel, Cisco Systems, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Intel and Microsoft, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (11) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2011, at 6:02 PM, techy46 wrote:

    We're in the iTV era, idiot television. Senationalism is in, it was The Great Recession, not quite 1973-83 was bigger, it was the worst drought, not quite check out 1928. It's dead money but safe as hell earning 5%.

  • Report this Comment On May 28, 2011, at 12:12 AM, jimmy4040 wrote:

    "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"

    So it's OK to look backward about the growth prospects of a company, but NOT OK to do so for share price.

    I see.

    Also why do columns like this talk about MSFT being overvalued ten years ago. Investors lost money LAST year, and the year before that. If it's not legitimate to look at past share price, then why is it legitimate to talk about it being overvalued ten years ago?

    Truthfully only the "value" investors like yourself care what MSFT was ten years ago. Most investors just care that they've lost money on MSFT in virtually any time period, including this week, this month, this year, etc.

  • Report this Comment On May 28, 2011, at 1:13 AM, GregLoire wrote:

    "So it's OK to look backward about the growth prospects of a company, but NOT OK to do so for share price."

    Yes, actually. Stock prices are speculative and forward-looking; performance of the actual company is not.

  • Report this Comment On May 28, 2011, at 12:32 PM, fitpro42 wrote:

    I totally agree with this article and that is why I am going long on MSFT. I'm picking it to double in the next two years along with the rising demand for PC's in China. Everyone keeps saying MSFT is eventually going to fall and they keep growing and growing. Microsoft is also only 1 of 4 companies on NYSE that has a AAA credit rating. I love the majority consensus that this company will fall because it is giving the company great valuations and will give me great profits!

  • Report this Comment On May 28, 2011, at 5:04 PM, beastofbodmin wrote:

    Apart from the Divi a holder of MSFT, etc. could have reduced their cost basis as the stock fell by selling covered calls and puts.

  • Report this Comment On May 28, 2011, at 10:23 PM, IJumpInIt wrote:

    "Dead money" has been a term used in poker for a long time just means putting money in the pot with the worst hand and no way to win. Hence its dead you lost it.

  • Report this Comment On May 29, 2011, at 9:29 AM, jimmy4040 wrote:

    fitpro:

    I don't think anybody that I have read is saying that MSFT will fail. It's just that the shares are dead until/unless Ballmer leaves.

    It really deosn't have anything at all to do with the valuation 10 years ago. Try to find another company out there ANYWHERE, where anaylsts tell you that the problem with the share price today is the share price ten years ago. You won't be able to find a single example, because it just doesn't happen.

    David Einhorn is a smarter investor than all the rest of us put together and he pointed it out this week.

    MSFT really isn't a public company at all, in the sense that Gates and Ballmer don't make decisions based on what's best for the shareholders in total, just for themselves. Why do you think the dividend isn't higher? Gates and Ballmer don't want or need the cash.

  • Report this Comment On May 29, 2011, at 9:29 PM, Joulesh wrote:

    I agree that MSFT was over-valued in the past decade, that's why the shareprice fell. It corrected. A lot of people lost money in the stock because a lot of people owned microsoft (overvalued!). Now, some investors are too ignorant to actually look at the financials of MSFT and comprehend everything (the overvaluation and present situation). These people think microsoft stinks because they themselves lost money or maybe they didn't own it and just know that the share price dropped considerably in the past decade. The investors who are smart enough to run the numbers are also smart enough to realize that MSFT is sitting on tons of cash that it is not returning to shareholders and has no idea what to do with, and is in competition with two of the greatest companies in the world, Google and Apple, and to top it all of they've been behind on all the new tech trends, that is, phones and tablets. So, they aren't innovating, they have huge competition and Balmer doesn't know what to do with their free cash-flow. That's why MSFT is not a good buy right now. Its too risky. It's just unclear if they can maintain those earnings they've had over the past 10 years.

  • Report this Comment On May 30, 2011, at 10:39 AM, jimmy4040 wrote:

    joulesh:

    Shhh, you're not allowed to mention Ballmer's name in a MSFT story in MF. Haven't you noticed that none of the authors ever does? This is the third MSFT story this week alone and his name hasn't pooped up even once.

    MSFT is the only company in the US that has no CEO, don't you know!

  • Report this Comment On May 30, 2011, at 11:44 AM, Alfred05 wrote:

    MSFT is one US company that defined the age of computer based data that evolved into management of information.....equaiting MSFT with Berkshire Hathaway is another ego trip for its founder

    ALP

  • Report this Comment On May 30, 2011, at 6:00 PM, plange01 wrote:

    msft has been dead money for at least 10 years!it was at 50 and split to 25 under the hopes the lower price would attract more investors ten years later its still there!

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