What is a 'Wallflower'

A wallflower describes a stock in which the investment community has lost interest, resulting in low trading volumes.

BREAKING DOWN 'Wallflower'

A wallflower typically sits in an unpopular industry sector. Due to the general neglect shown to such stocks by traders, they may trade at 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.

The term wallflower derives from slang for individuals who remain outside of the general buzz and conversation at a social function, hugging the walls rather than interacting. In the trading markets, wallflower stocks likewise sit all dressed up with no place to go, waiting for attention from investors but typically without doing much 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. Scant information to recommend the stock from the analyst community and uncertainty on pricing and value act as a deterrent for retail investors, creating potential for such stocks to languish further.

Bubbles Can Turn Hot Issues to Wallflowers

While unpopular market segments generate fertile ground for wallflowers, economic bubbles in hot market segments can provide a warning sign that today’s hot issue could be tomorrow’s wallflower. Consider the dotcom bubble, during which investors threw money at Internet startups almost 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 at best.

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 many of the freshly minted dotcom companies faded rapidly into wallflower status as investor funding dried up. Various media outlets began to refer to the crop of failing companies as “dot bombs,” the majority of which had blown up by the end of 2001, taking trillions of dollars of investment capital with them.

Finding Value Stocks Among the Wallflowers

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

RELATED TERMS
  1. Active Stocks

    Active stocks are heavily-traded stocks on an exchange, which ...
  2. Sector

    A sector is an area of the economy in which businesses share ...
  3. Average Daily Trading Volume - ...

    The Average Daily Trading Volume (ADTV) is the average amount ...
  4. Dollar Volume Liquidity

    The price of a stock or ETF multiplied by its daily trading volume ...
  5. Net Volume

    Net volume is a technical indicator that's calculated by subtracting ...
  6. Buy The Book

    An order to purchase all shares available in the market for a ...
Related Articles
  1. Investing

    Is a Stock's Trade Volume Important?

    Stock volume is easy to calculate but understanding its importance is a little more involved. Take the time because it's a worthwhile investing tool.
  2. Trading

    Essential Strategies For Trading Volume

    Looking to trade using volume? Have a look at these essential tips.
  3. Trading

    5 Top Traded Stocks

    Microsoft and GE are two of the biggest names on this list of stocks that have a consistently high trading volume.
  4. Insights

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of bull and bear markets, the two types of market conditions.
  5. Tech

    Regional, Community Bank Stocks the Next Big Thing

    The very best opportunities are often in the less exciting stocks and sectors. Community banks may not be sexy, but they can be very profitable investments.
  6. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  7. Investing

    An Introduction to Sector Mutual Funds

    Investing among several different sectors in the economy is a way to diversify your portfolio.
  8. Investing

    Why Big Tech Stocks Have 9% Upside

    The technology sector is outperforming the broader market but can still soar over the next few months.
  9. Investing

    Top 5 reasons for a stock slide

    Prices seldom drop without cause. Find out what might make your stock unexpectedly decline following an earnings report.
  10. Investing

    Assessing Asset Bubbles: Microsoft in 2001 vs. Today (MSFT)

    Understand the inner working of high-multiple stocks such as Microsoft, especially how earnings may play a role in the change of a stock's multiple.
RELATED FAQS
  1. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  2. What number of shares determines adequate liquidity for a stock?

    Learn how the liquidity of a company's shares is generally affected by bid-ask spread and trading volume of shares bought ... Read Answer >>
  3. Are We In A Bull Market Or A Bear Market?

    Rising price signifies a bull market while falling price signifies a bear market but the devil is in the details.. Read Answer >>
  4. Are Stocks With Large Daily Volume Less Volatile?

    There is a fairly direct relationship between the volume of a traded stock and its volatility. Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center