Stocks making 52-week lows and the dangers of averaging down

The past 12 months has severely punished investors that have failed to pivot out of last year’s investing fad - fast growing tech companies.

It goes to show that every market cycle blesses someone, but with every new cycle, the leading names are different. While tech might have dominated top gainer lists 18 months ago, they've now been replaced by stocks from sectors such as lithium, nickel and rare earths.

Being in the right place at the right time can do you wonders, but staying in the same place for too long can lead you back to square one.

Stocks making 52-week lows

• Megaport (ASX: MP1)

• Codan (ASX: CDA)

• PointsBet (ASX: PBH)

• Zip (ASX: Z1P) 

• Tyro Payments (ASX: TYR) 

• EML Payments (ASX: EML) 

• Audinate (ASX: AD8)

• Bigtincan (ASX: BTH)

• Redbubble (ASX: RBL)

• Dubber (ASX: DUB)

• Elmo Software (ASX: ELO) 

• Kogan (ASX: KGN)

Stocks among the list have declined an average of -59% in the past year and the median decline is -65%. 

Key takeaways

Follow the leader

Afterpay - which was acquired by Block (ASX: SQ2) - was arguably one of the most powerful market leaders in the tech space. If Afterpay was green, that was enough to pull both the S&P/ASX 200 Info Tech Index and individual tech names higher. 

In saying that, Afterpay’s rate of upward momentum would eventually slow in February 2021 and become more erratic as the stock was under distribution, topping out and fundamentals came under pressure.

S&P/ASX 200 Info Tech Chart. Also a very close replica of Afterpay (Source: TradingView, Annotations by MarketIndex)

Afterpay or the tech sector went from being a strong, upwards trend to trendless, to collapsing.

It might be worth paying attention to when a sector or leading tops out and how it behaves afterwards.

The nightmares of averaging down

As stupid as this may sound, a stock cannot make a huge move without making new highs.

Investors cheer and say "I knew I was right" when share prices go up. So wouldn't it make sense to say "I was wrong" when prices go down?

Cathie Wood is perhaps the ultimate example of averaging down on beaten up stocks. Her fund - Ark Invest - has invested heavily into Teladoc (NYSE: TDOC), a telemedicine and virtual healthcare company.

You can see how painful it is to be averaging down, all the way to $33 - a 90% drawdown from February 2021 highs.

Teldadoc weekly price chart. Green docs indicative of when Ark Invest purchased Teladoc shares (Source: TradingView, Annotations by Market Index)

After recent purchases, the Ark ETF owns about 17.8m shares worth around US$1.1bn. The position is down around -50%.

The narrative didn’t matter

Codan is perhaps one of the more unfortunate names to be clumped together with the other tech losers.

Around half Codan's revenues come from selling metal detection devices, and the other half from a broad range of communications products sold to defense, mining and industrial sectors.

Unlike its peers, Codan is highly profitable. In FY21, the company grew net profits by 41% to $90.2m and trades at a price-to-earnings ratio of just 13.

Codan shares topped out in June 2021 at around $19.30 and its been downward trending ever since.

Codan 12-month price chart

If an investor were to fall in love with the Codan narrative and believe that the company was undervalued with a strong growth outlook, then they'd love the stock even more today, at $7.00.