In Dips, Rule Breakers Add Up & Don’t Double Down
Here's one way to decide your next step when you're facing a sea of red in your brokerage account.
Investors are feeling the urge to double down on stocks that have fallen significantly since the start of the month. The Nasdaq-100 has dropped 7% from its peak reached on October 6th. Many of these falling stocks are AI-linked companies, which are heavily weighted in major indexes. When everything is down, every falling stock appears to have more room to rebound.
The second habit in the Rule Breakers strategy advises investors to avoid doubling down on losing stocks. Buying more shares of a losing stock seems to be a repair job, but the company has no knowledge of the investor's original cost. The only question that new money should ask is which business is more likely to be worth more in the future. A stock that has dropped a third indicates either a misreading by the market or a cracking business, and it is unclear which.
Alphabet (GOOG -3.08%)(GOOGL -3.15%) is an example of a stock that has been recommended by Rule Breakers. It was recommended in June 2022 at a split-adjusted price of $113.75 and has nearly tripled since. Alphabet has grown 24% in revenue to nearly $120 billion in its latest quarter, with Google Cloud growing 82%. Customers have signed contracts worth $514 billion in future Cloud revenue, equivalent to five years of sales at the current pace.
However, spending is the main risk for Alphabet. Management has raised its plan for the year to as much as $205 billion, mostly for data centers supporting its AI. If demand cools, this spending may become hard to justify. Alphabet is due to report again on October 28th, making the next test days away.
To double down on a laggard stock, one would have to believe that the market has misjudged it and that their final decision is right. To invest in a winner like Alphabet, one would have to believe that the business will continue to perform well and that the recent slide is a result of nervous traders rather than the company's performance. Investors should consider which stock in their portfolio is tempting them the most this month: the one that has fallen the farthest or the one that has been proving them right.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
