Are These 4 Beaten-Down Former Favorites Ready to Rally Again in 2022?

Last year was a good one, overall, for the market. The S&P 500 (SNPINDEX: ^GSPC) ultimately logged a 27% gain in 2021, leading most stocks higher with it.

A handful of surprising names didn't latch onto that rising tide, though. Indeed, a handful of the market's once-favorite names managed to end last year in the red. Among the worst were streaming TV tech name Roku (NASDAQ: ROKU) and relatively straightforward telecom outfit T-Mobile US (NASDAQ: TMUS), losing 44% and nearly 18% of their value, respectively. Las Vegas Sands (NYSE: LVS) and Peloton Interactive (NASDAQ: PTON) are also among the names that dished out losses that don't quite jibe with their blue chip stature.

These steep sell-offs have some bargain-minded investors thinking about a purchase, of course. Stepping into a good company is an even better buy while its stock's price is suppressed. Before you take such a plunge, though, think twice. There's more to the story than just a year's worth of weakness.

Blue chips in the red for good reason

Astute followers of the market will know the reasons for most of these pullbacks.

For instance, Peloton's 76% tumble in calendar 2021 can largely be attributed to consumers' return to their gyms, crimping interest in at-home fitness equipment. Roku is contending with its stock's lofty valuation, which soared in 2020 after COVID-19 lockdowns kept people at home, starved for entertainment. Las Vegas Sands isn't shrugging off the coronavirus contagion as quickly as anticipated, particularly now that China's regulators are rethinking how it allows Macau's gambling industry to operate. Like Roku, T-Mobile shares have struggled to hold onto big (but temporary) gains reaped in 2020 and early 2021 now that subscriber growth is slowing thanks to sheer market saturation. A data breach suffered in August didn't help matters either.

Image source: Getty Images.

None of these challenges are inherently permanent problems. The bulk of these stocks' recent weakness can be chalked up to the extraordinary circumstances of 2020, which led to extraordinary but unsustainable stock prices. Given time, their underlying businesses stabilize. Their stocks should eventually follow suit.

Simply buying these high-profile stocks at the beginning of a new calendar year because they lost so much ground during the previous calendar year, however, isn't the best stock-picking approach.

Stocks don't care about the calendar

Yes, plenty of investors use the advent of a new year as a prompt to rethink their portfolios. They're not doing so because there's an advantage at the time, however. That's often when they have the free time to make such changes or when they're suddenly flush with cash after waiting until a new year to exit a position that will create a tax liability. Individual stocks don't move in a calendar-based cycle, and the bigger secular trends that impact a company's operation aren't swayed by the time of year.

Take Peloton's meltdown as an example. The company's workout equipment melded fitness with technology at a time when wireless connectivity and the virtual workout industry were just reaching critical mass at the ideal time — the beginning of the pandemic lockdowns. COVID-19 infections have just soared to record levels, but consumers don't care. They may never care again, in fact, as pandemic fatigue sets in, undermining the crux of Peloton's fiscal 2021 sales growth of 120%.

Roku is another example of a stock that's been mostly buoyed by a secular shift in how we watch streaming television rather than a cyclical one. Roku was, at one point, the market leader in the set-top receiver market. But the no-moat industry has become more fragmented instead of less fragmented in recent years, surprising once-stoked investors. Roku's effort to develop its own ad-supported entertainment app has also bumped into more established competition that's never going to go away. We just don't know when Roku shares will be right-priced to reflect this reality.

In a similar vein, we also just don't know how, when, or if China's regulators will clamp down on Macau's gambling industry, which was supposed to be a key growth driver for many familiar American casino operators.

There's always more to the story

The point is, just buying beaten-down stocks because they've been beaten down isn't inherently a great strategy.

That's not to say you should never buy severely sold-off stocks. As I noted just a few days ago, a handful of NYSE-listed losers from 2021 are compelling buys at their current prices. There was more to their story that makes those tickers primed for a rebound, however. In the same sense, it's the “rest of the story” that makes the four blue chip stocks discussed above just a bit too dangerous to bet on just yet. Be patient, and wait for the bigger-picture tide to turn back in their favor.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Peloton Interactive and Roku. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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