Just because a stock lags behind the broader market doesn't make it a good or bad investment. You need to dig a little more deeply to understand what's going on. Here's why Stanley Black & Decker's (SWK -0.46%) laggard performance over the past year could make it a good addition to your portfolio -- and why Carvana (CVNA 0.17%) and Annaly Capital Management (NLY -0.46%) are best avoided.

1. Another tough year ahead

Stanley Black & Decker is an industrial company that makes tools. It has a highly cyclical business with notable exposure to retail customers, which tends to lead to very rapid business downturns.

That's exactly what took place in 2022, when adjusted earnings fell to $4.62 per share from $10.48 in 2021. It's going to be another bad year in 2023, as well with management guiding to adjusted earnings of zero to $2 per share.

There are a number of factors involved in the weak string of results, including the impact of inflation, economic headwinds, bloated inventory levels, and historically high leverage, among other things. Management is well aware of what it is facing and taking action to right the ship.

That includes things that will increase the pain in the near term to improve the business over the long term. For example, it is reducing inventory by running factories at reduced levels, which hurts margins. Other efforts to improve the long-term outlook include debt reduction and cost-cutting.

But the company is still financially strong and has a long history of success, including paying dividends for more than 140 years. In light of the stock's historically high yield of 3.5%, long-term investors should probably give management the benefit of the doubt even though the stock is down more than 40% over the past year versus a roughly 8% drop for the S&P 500 index. 

2. High debt, no earnings

Carvana is a digitally focused used-car retailer and was a very hot stock during the early days of the coronavirus pandemic in 2020, when people were stuck at home. Since that point, the company's shares have crumbled.

Over the past year alone, the stock is down around 90%. There are a number of problems here that investors need to think about carefully.

For starters, Carvana has yet to produce a full-year profit. Meanwhile, leverage (looking at the debt-to-equity ratio) rocketed higher in 2022 even though the company isn't covering its interest expenses, tracked using the times-interest-earned ratio.

To be fair, Carvana is a young company and working to grow its business, but the trends here are very troubling in a business that requires a lot of capital (vehicles are high-cost items). Perhaps if it can figure out a way to at least break even, it would be worth reconsidering, but right now, Carvana is not a good risk/reward trade-off for most investors.

3. Too much dividend volatility

Annaly Capital is a mortgage real estate investment trust (REIT), which means that it owns a portfolio of mortgages and not physical property.

Most retail investors will think of REITs as income investments, but that's not really the case for mortgage REITs, which are better seen as total-return investments. This is an important distinction.

If you are looking to live off of the dividends your portfolio produces, you want income stocks; if you are going to perpetually reinvest dividends because income isn't your goal, then total return is what you are after. An income investor wants a steady and growing dividend. But Annaly's dividend has been on a steady downtrend over the past decade.

The thing is, its stock price has been heading lower as well. The end result, since yield and stock price go in opposite directions, is a consistently high dividend yield, often over 10%.

But given those dividend cuts, income-focused investors would have been faced with the double hit of lower dividends and a capital loss, given the stock's roughly 60% decline over the past 10 years. (By comparison, if you reinvested those fat dividends, the total return is positive over the past decade.)

Annaly's stock price has fallen roughly 20% over the past year, and the payout's yield is an enticing 14.8%. But dividend investors should look for a more reliable income stream.

Know what you own

Just because a stock goes up or down is not enough to tell you whether or not it is worth buying. Stanley Black & Decker is facing headwinds, but is doing something about them and, just as important, has a long history of success behind it. It is highly likely that it comes through the current headwinds in one piece.

The same can't be said of upstart used car dealer Carvana, which is facing the deadly combination of high leverage and red ink. That's a combination that can't go on for very long. And while Annaly is a perfectly fine mortgage REIT, its highly volatile dividend is a warning that most dividend investors should stay away.