One of the most tempting, and risky, approaches to investing to look for beaten up stocks and try to buy while shares are weak in hope of a quick bounce. In some cases, this strategy can lead to quick gains, but more often than not the exact opposite outcome occurs.
The reason why this approach is so risky is that weak stocks are usually weak for a good reason. And typically it takes a long time for a company to correct whatever problem the market sees in the company’s underlying business.
This is obviously not always the case. Consider social media leader Facebook (FB). Earlier this year the stock took a big hit on its recent data scandal, but the stock quickly found its footing and erased its losses as the market realized it had overreacted to the news, and that the long-term outlook was not much different for the stock than it was prior to the scandal.
This is a case where buying into weakness would have paid off, but this is not typical. It is hard to “catch a falling knife”, and you are usually better off looking for strong stocks that have the potential to build on their recent gains.
If you are tempted to put some money to work in weak stocks, make sure to limit your exposure, and never invest more than you are willing to lose. Given the recent market volatility, there are some high-quality stocks that have sold off more than they should have in recent months, but here are five stocks that the market hates which you should probably avoid investing in at this time.