Simply defined, a fallen angel bond is one that was once investment grade, but has been reduced to junk bond status by the evaluating organizations. That means that its value has fallen dramatically from its high point. This does not always mean that the bond has no value to the investor, just that at this particular moment it has very low value and may very well herald bankruptcy.
There are some fallen angels which are seriously worth considering. BP was considered such a stock after the Deep Horizon oil spill. Shares of this stock fell 40%, making it very affordable for just about every investor. The company has sufficient capital to survive this kind of tumble, barring additional incidents. In fact, for those who purchased BP stock as it hit bottom, it turned out to be an excellent choice. The stock has come back up nearly 30% since them.
Often, before a stock achieves the “status” of a fallen angel it will be considered an angel stock. These are stocks which are skirting the margin of failure or being listed as a “junk” bond, but haven’t quite dropped so low. What you want to see with a fallen angel, before you invest, is that the company still has a reasonable profit margin. Chances are that the lowered price and value is a reflection of the stock correcting its price by shedding unnecessary assets, but sales should remain reasonable.
Clearly, investing in fallen angels contains a good deal of risk if you can’t read the signs correctly. If you are dependent upon the performance of your portfolio, it might be best to stick to more consistent performers.
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