Stock market history is rife with famous examples of once-popular stocks that crashed to the ground with vertiginous speed. But aside from the damage they caused investors, these stock collapses also convey lasting lessons. Below is a quick look at four incidents that were among the most painful and instructional.
Indeed, many analysts right now are pointing to an entire group of dangerous stocks that are poised to plummet. The following stories are cautionary tales for any investor who might be susceptible to fads, or deluded enough to think that any stock is rock-solid and immune from collapse.
Our four stock flops are ranked in order of magnitude, with the first being the most destructive for not only investors but also the wider economy.
1. Bear Stearns
In terms of equity bust-ups, Bear Stearns is the mother of them all. We're all sadly familiar with the tragedy of Bear Stearns, the investment house that became overexposed in the market for securitized sub-prime mortgages.
In March 2008, Bear Stearns' stock plummeted from its 52-week high of $133.20 per share, traded before the crisis, to an astonishing low of $2.00, on a $236.2 million buyout offer from JPMorgan Chase. In January 2010, new owner JPMorgan discontinued using the Bear Stearns name, which had become synonymous with greed and reckless mismanagement.
The collapse of this once-venerable Wall Street brand name precipitated the Great Financial Meltdown of 2008. The dizzying failure of Bear Stearns' stock set off a global economic domino effect with which we're still coping.
This energy company was No. 7 on the Fortune 500 list of biggest companies and was once touted as an exemplar of American enterprise. It was one of those companies that just seemed too good to fail, a huge entity that could never possibly run out of money. But it did -- and fast. Enron's wildly inflated stock was a ticking time bomb that finally exploded.
Enron's stock price hit a high of $90 per share in mid-2000; by the end of November 2001, the stock price had plummeted to less than $1 a share, causing shareholders to lose nearly $11 billion, wiping out the retirement plans and nest eggs of thousands of employees.
The company went bankrupt in December 2001. A complex web of egregious accounting irregularities and financial abuses came to light, leading to federal investigations, regulatory reforms, and prison sentences for some of the company's top executives. The name "Enron" has become synonymous with corruption and bad investments.
In fact, as part of a highly publicized scandal that's still playing out in the news, Citron Research recently published reports alleging that Valeant Pharmaceuticals had instigated questionable drug pricing practices on a corrupt scale reminiscent of Enron, which is just about the worst insult you can hurl at a company.
3. Coleco Industries
During the technology boom of the early 1980s, this maker of children's plastic swimming pools came out with bargain-priced computer video games and a home computer dubbed "Adam." It also produced Cabbage Patch dolls. Remember the Cabbage Patch doll craze of the 1980s? Not since the Dutch Tulip Mania of the 17th century had the crowd been so manic over a fad.
These hot products turned the company's stock into a high-tech darling on Wall Street. The company's stock had been languishing at about $7 a share in August 1982; by June 1983, it was trading at a whopping $65 a share.
Then it fell off a cliff. First, shares plunged more than 50% from June to August 1983, as sales of its products dramatically slowed. By March 1984, Coleco stock had plummeted to roughly $10 a share. In 1988, the company filed for bankruptcy.
Just as the high-tech boom of the early 1980s propelled Coleco, the dot-com boom of the late 1990s propelled this stock. In February 2000, a month before the tech bubble went bust, Pets.com launched an $82.5 million IPO. By November of that year, the company had gone bankrupt and closed its doors. The stock had fallen from over $11 per share in February to 19 cents the day of its bankruptcy announcement.
During its heyday, the company was backed by e-commerce giant Amazon and was the dominant online pet store, well known for its sock puppet spokesdog. But the company mismanaged its cash, investing in costly TV advertising -- notably, during the Super Bowl -- instead of investing its money back into the basics of its business.
These are all horrific investment stories, but danger in the stock market still abounds. If you want to see a list of highly vulnerable stocks now on the verge of crashing, I urge you to take a look at this report called 29 Dangerous Stocks: Sell Now! Inside, you'll see a full list of the market's most overvalued stocks, and learn the process you can use to keep avoiding them in the future. Click here now for a copy.
John Persinos is editorial manager at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.