Wallflower

What Is a Wallflower?

In finance, a wallflower describes a stock wherein the investment community has lost interest, resulting in low trading volumes.

Understanding a Wallflower

A wallflower stock typically sits in an unpopular industry sector. Due to the general neglect displayed to such stocks by traders, they might trade at a low price to earnings (P/E) or price to book (P/B) ratios, creating potential value should attention shift toward them again at a later date.

In the trading markets, wallflower stocks likewise sit looking sharp with no place to go, waiting for attention from investors but typically without doing a lot of anything to generate real interest. That lack of interest can cause a snowball effect as analysts ignore the stock, and low trading volumes lead to uncertain pricing and wide bid-ask spreads.

Sparse data to recommend the stock from the analyst community and uncertainty on pricing and value act as a deterrent for retail investors, creating the potential for such stocks to mull further.

Wallflowers and Economic Bubbles

While unpopular market segments generate fertile ground for wallflowers, economic bubbles in hot market segments can provide a warning sign that the present hot issue could be the upcoming wallflower. Consider the dotcom bubble, during which investors threw money at Internet startups indiscriminately. The amount of money available for any company related to the internet led to massive initial public offerings for companies that, in some cases, boasted questionable fundamentals, best case scenario.

A sell-off among major players in the technology sector sparked by Cisco and Dell, among others, resulted in a brutal bear market for Internet stocks. It took the NASDAQ 15 years to recover to the peak it hit in March 2000, and large numbers of the freshly minted dotcom companies faded rapidly into wallflower status as investor funding dried up.

Different media outlets began to refer to the crop of bombing companies as "spot bombs," the majority of which had blown up by the end of 2001, taking trillions of dollars of investment capital with them.

The term wallflower derives from shoptalk for people who remain outside of the general buzz and conversation at a social function, embracing the walls rather than interacting.

Special Considerations

Some wallflowers with decent fundamentals retain enough potential to interest investors since the low P/E or P/B ratios associated with these companies make them reasonable candidates for value stocks. These stocks bear relatively higher risk than growth stocks because a failure to attract future attention could result in them mulling further.

However, the upside to investing in a value stock can be considerable if and when the investing community recognizes its potential and prices move to closely match the fundamental strength of the company more.

Features

• Unpopular market segments might make fertile ground for wallflowers,
• Wallflower stocks bear relatively higher risk than growth stocks.
• A "wallflower" in the stock market refers to an unpopular or neglected stock.
• A wallflower stock is ordinarily in an unpopular industry sector and has a low trading volume.
• A trendy or hot issue might burn out, becoming a future wallflower.