Flash in the pan. One-hit wonder.
For a musician, that label can be a double-edged sword. On one hand, it means that you're a has-been and that you were unable to repeat the success that you had with a hit song. (Depending on your age, think of The Archies, Dexy's Midnight Runners or Chumbawamba.)
However, if your hit was big enough, it likely will keep paying off long after your star has faded. You'll get royalties when it's played on oldies radio. You'll get invited to play on kitschy, nostalgic concert tours. It may not be what the musician dreamed of, but it can still pay.
For investors in one-hit wonder stocks, however, there's no upside. There's no recouping what you lost when you invested in these once-promising stocks at $80 per share only to see the value plummet to near $0.
In hindsight, it's pretty easy to see why these stocks crashed and burned. Many were likely doomed to fail from the start. Yet at the time, investors grew excited over the prospects of great fortunes being made in a once-in-a-generation stock pick.
Sadly, investors will keep falling for these "can't miss" stocks. Yet you can avoid making the same mistake -- if you heed history's lessons.
Here is a sampling of some of the biggest busts of the past 20 years.
You've likely never heard of Presstek (Nasdaq: PRST), a small printing company. Today, its stock trades for just 47 cents, its market value is merely $17.6 million and it has been many years since the company turned a meaningful profit. But this was arguably the hottest stock of the mid-1990s -- as its stock soared from under $10 in 1994 to an eye-popping $80 by 1996.
Back then, investors were buzzing that Presstek had developed new technologies that would revolutionize the printing industry. Those claims were put forth byRobert Howard, who had a checkered history with public companies going back to 1980.
shares really took off when ads ran on CNBC touting the home-run potential for Presstek. These ads were sponsored by an investment newsletter called the Cabot . But short sellers -- those who try to make money when a stock's price goes down -- smelled a fraud in the making and, soon enough, the Security and Exchange (SEC) was looking into Presstek's claims of sizzling demand from new customers.
The whole scam eventually unraveled, and shares are now more than 99% lower.
Around that same time, investors were beginning to embrace what would eventually be an investing bubble in dot-com and telecom stocks -- and this company was the poster child for the era's excesses.
Diana Corp. had been in the meatpacking industry but decided its stock would fare better if it called itself a telecom company. Management began making the rounds in the financial media, suggesting that the company had developed a telecom switch which would -- here's that phrase again -- revolutionize the industry.
Investors who flocked to a company that claimed to leapfrog industry leader Cisco Systems (Nasdaq: CSCO) in terms of technology leadership got what they deserved. Shares briefly flirted with the $100 mark in 1997 before reality set in and shares eventually became worthless.
Palm, Inc., Boo.com And Other Dot-Coms
Of course, the late 1990s saw an explosion of IPOs that briefly attached billion-dollar valuations to companies with few customers and minuscule revenue bases. For every Amazon.com (Nasdaq: AMZN) that would go on to meet lofty expectations, there were another half-dozen or more companies that quickly vanished.
Names like Pets.com, Webvan.com, MyPoints.com and many others are now merely answers to trivia questions. At the time, however, many of these companies believed their own hype and lost all sense of financial acumen. For example, online retailer Boo.com spent nearly $200 million on ads in 1998 and 1999. By the following spring, it was out of business.
Remember the Palm Pilot? Well, investors loved the product so much that they bid up shares of Palm, Inc., to $95 on its first day of trading -- March 1, 2000. (Notably, the Nasdaq would hit its all-time high just eight days later).
By the summer of 2001, the last investors in this stock finally threw in the towel, as shares had lost more than 90% of their value from that first-day peak.
For the next half-decade after the dot-com bubble, investors seemed chastened, and few bubble stocks emerged. But by mid-decade, with the economy looking healthier, greed returned and investors once again went in search of "too good to be true" stocks.
Few investors talk about Taser (Nasdaq: TASR) these days, as its shares languish around $5. But from 2003 through 2005, the stock had zoomed from $5 to $75, prior to a three-for-one split. Investors hoped that the company's non-lethal stun gun would -- wait for it -- "revolutionize" law enforcement.
Well, non-lethal turned out to be a misnomer, as the occasional heart attack ensued and the company was smacked with a bunch of lawsuits.
The Investing Answer: The easiest way to avoid being burned is to stick with companies that have a proven track record. Even if you prefer to find stocks that possess robust growth prospects, remember to stick with the old investing acronym "GARP," which stands for Growth at a Reasonable Price. If you can find growth stocks that trade like value stocks, you are already ahead of the game.
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