Key Takeaways
- Laggards underperform peers and benchmarks.
- Often have low share prices and valuations.
- Hold higher opportunity costs for investors.
- Laggard investors buy late, risking losses.
What is Laggard?
A laggard is an asset or security that consistently underperforms compared to its benchmark, sector peers, or the broader market. In finance, laggards show lower rates of return than comparable investments, signaling weaker growth or profitability.
This term also applies beyond finance, describing consumers who are slow to adopt innovations, often influenced by demographic factors like those affecting the baby boomer generation.
Key Characteristics
Laggards exhibit distinct traits that help identify their underperformance in markets or adoption cycles:
- Consistent underperformance: Persistently lower returns than sector peers or indexes.
- Low valuation metrics: Reduced price-to-earnings and price-to-sales ratios reflect limited investor confidence.
- Depressed share prices: Often trade near penny stock levels due to lack of growth prospects (pennystock).
- Lower volatility: Typically less price fluctuation compared to high-growth stocks.
- Late adopters: In consumer markets, laggards delay embracing trends unlike early adopters (early adopter).
How It Works
Laggards operate through a pattern of underperformance relative to more dynamic competitors. When a sector experiences growth, laggard stocks fail to capture the upward momentum, resulting in opportunity costs for investors who hold them instead of higher-performing assets.
Investors should recognize that laggards may continue their slow growth unless a significant catalyst arises. Understanding factor investing strategies can help identify whether a laggard has potential value or is simply a persistent underperformer.
Examples and Use Cases
Identifying laggards within industries or markets can guide portfolio adjustments and risk management:
- Airlines: While companies like Delta have generally outperformed, others may lag due to operational challenges.
- Dividend stocks: Some laggards may still offer attractive yields, making them candidates for specific income-focused portfolios (best dividend stocks).
- Growth stocks: Laggards typically fall out of favor in growth-focused sectors but could rebound, as seen in analyses of best growth stocks.
Important Considerations
Before holding or buying laggards, evaluate if the underperformance stems from temporary setbacks or structural issues. Misinterpreting laggards as bargains can lead to prolonged losses.
Regular portfolio reviews should consider replacing laggards with more promising assets, such as those found among low-cost index funds that track broader market performance efficiently.
Final Words
Laggards signal underperformance that can erode your portfolio’s returns over time. Evaluate whether these assets still hold value or if reallocating to stronger performers aligns better with your goals.
Frequently Asked Questions
A laggard in financial markets is a stock or security that consistently underperforms compared to its benchmark, sector peers, or the broader market. It often shows lower returns, depressed share prices, and lower valuation ratios than better-performing assets.
Stocks become laggards due to factors such as lost contracts, management problems, labor issues, or declining earnings in a competitive environment. These challenges prevent the company from keeping pace with its industry or market peers.
Investing in laggard stocks can lead to opportunity costs since these stocks typically deliver lower returns than their peers. Holding such underperforming assets might prevent you from benefiting from higher gains available in better-performing investments.
A laggard investor refers to someone who is among the last 5% of the market to buy a popular or high-flying stock. These investors often buy near the peak during hype-driven rallies and may suffer losses when stock prices decline afterward.
Outside finance, laggards describe individuals or groups who are the last to adopt new technologies or innovations. They tend to be skeptical, prefer established habits, and often delay change until it becomes unavoidable.
Laggard stocks usually have low share prices, low valuation ratios such as price-to-earnings and price-to-sales, lower volatility, and a history of persistent underperformance relative to their peers.
While it's possible for laggard stocks to rebound if a strong catalyst emerges, many continue to underperform over extended periods. Investors should carefully assess the reasons behind the underperformance before investing.
Laggards pose risks because they can lock investors into underperforming assets, leading to lost opportunities for better returns elsewhere. Without positive changes, these stocks may continue to decline or stagnate, increasing investment risk.
