Avoiding Dead Money

August 7, 2006

Sometimes selling a stock and transferring the money into a high-yield savings account is a better option than owning stocks that endlessly trade sideways.

Stocks generally tend to move in the upward direction in the long term, but there are some stocks that seem to hopelessly have no direction. To make matters worse, these companies have few prospects for a future turnaround. Instead of owning these laggards and anxiously hoping for the companies to recover, an internet savings account or new investment plan is a better option.

Some investors whose post-2000 bubble-bursting portfolios remain flat wonder why they haven’t recovered some of their lost money. The reason is that many companies are stuck in their old ways, while other promising companies who regrouped following the 2000 speculative fallout have performed spectacularly. Struggling stocks are very prevalent in the telecom industry.

Nortel Networks (NT) traded as high as $89 in July of 2000, but is barely clinging to the $2 level today. The Canadian telecom equipment maker once took part in the Wall Street speculative craze of 2000 on high expectations for its fiber optic networking gear. A series of failed management changes have resulted in little benefit to shareholders. Holding the stock and hoping for $10 a share seems pointless – you would do better to just cut your loss immediately.

Another weak stock in the class of Nortel is Lucent Technologies (LU). This telecom player once traded as high as $80, but is only worth $2 and change today. The company has failed to produce earnings growth to appease shareholders, recently announcing a $13.4 billion merger with Alcatel (ALA) on hopes that the combined company will fare better than the two individually. The deal will help curb costs, but the deficient business model remains.

Stocks like Nortel and Lucent are worthless to investors. Due to their low share prices, many brokerages won’t allow you to short-sell these stocks. If the stocks continue to go down past the level where you can profit from any downfall, what is the point of investing in these companies?

Instead, safely tucking away the money from these stocks into either better companies or high-yield online savings account is a smarter move. Several banks are offering over 5% annual percentage yields with no catches and no risk to you. Emigrant Direct is offering an industry-leading 5.15%. Rival ING Direct offers a lower rate of 4.35%, although you can get a $25 account opening bonus if you open through a referral from me and a $250 opening balance. To request a referral, please use the contact form in the menu. In many cases, this bonus makes up for the reduced rate.

Qwest Communications (Q) has managed to buck the trend of faltering telecommunications carriers. While Nortel and Lucent have failed to grow earnings, Qwest has managed to reverse its fortunes and invigorate its stock. After trading just above a dollar in August 2002, Qwest shares are now worth $8.66 apiece. It is important to keep in mind that for every Qwest, there are many JDS Uniphase’s (JDSU), Nortel’s, and Lucent’s.

There are better uses for your money than owning poor stocks with dire prospects. Cashing out or changing to a different investment is better than holding onto a poor company pointlessly. Fortunate companies like Quest can engineer a turnaround, but others like Nortel and Lucent are doomed. Dead stocks are not limited to the telecom sector, and investors should beware these portfolio killers.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.