Definition of Fallen Angel

What is the definition of a "fallen angel" as it applies to stocks?

A "fallen angel" is a stock that used to be strong (hence the term "angel") but has since fallen out of favor with investors.

In tradition terms, a "fallen angel" is an angel that has been banished from Heaven.

In terms of the stock market, a "fallen angel" used to be great (Heaven), but has now been banished into a more sinister place (Hell, or on the selling/shorting lists of investors).

Sometimes "fallen angels" can become very strong value plays. Sometimes stocks become "fallen angels" only temporarily, and then eventually resume their upwards climb.

However, more often than not, "fallen angels" end up in the proverbial scrap-heap of the stock market.

"Fallen angels" have normally fallen for a reason. That reason might be declining earnings, that reason might be an accounting scandal, or that reason might be decreasing market share.

What the reason is - it's normally a very good one. The market tends to be very efficient when it comes to pricing stocks, and if something has fallen, it is normally for a very good reason.

Let's look at a couple of real-world examples of "fallen angels":

Example #1: General Motors.

General Motors used to be one of the most respected, revered and profitable (shocking as that may be) companies in the world.

There was a time when nearly every investor in America either directly or indirectly owned shares of the company.

If you wanted to invest in a strong, profitable, American company, then there was no better choice than General Motors.

As you well know, General Motors fell on hard times and has since declared bankruptcy.

General Motors is a prime example of a "fallen angel".

Example #2: Washington Mutual.

Again, another company that used to be one of the crown jewels of the North American stock market.

Washington Mutual fell victim to the subprime mortgage crisis and was never able to recover.

One of the largest and most respected banks in the world practically vanished overnight, never to return.

As it was dropping into oblivion, many investors refused to give up on the company. They (incorrectly) figured that the company would never implode.

In reality, Washington Mutual was a prime example of a "fallen angel" - a company that investors used to sing the praises of, that eventually "fell from heaven", never to return.

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