'Dip Buyers' Get Badly Burned Scooping Up 8 Falling Stocks

It might be tempting to be a hero and buy crashing S&P 500 stocks. But it's a risky move that often leaves you holding the bag.

Investors who rushed to buy eight plunging stocks in the S&P 1500, including giants PayPal (PYPL) and Meta Platforms (FB) plus smaller firms like health care company Tabula Rasa HealthCare (TRHC), got crushed even after swooping in to get a "bargain" following 10% or more declines.

All these stocks, which dropped 10% or more from the S&P 500's recent high on Jan. 3 to the low on on Jan. 27, 2022, burned dip buyers. Each plunged an additional 10% or more, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That's not just a 10% correction anymore for these stocks. But puts them into a painful 20% bear market drop. That's the opposite of what buyers on the dip think they're getting.

Many investors, though, are ignoring the risks and trying to buy on the dip anyway.

"Clients were net buyers of the dip in U.S. equities" says a Bank of America report. BofA says investors looked to the January sell-off as an opportunity to pick up ETFs and individual stocks of all sizes at lower prices. They're continuing, though, to sell growth ETFs.

Dip Buyers In The S&P 500 Dodge Pain

It's unclear if the S&P 500 has finally put in a bottom. Markets are convulsing as the risk of higher short-term interest rates and soaring inflation loom.

And that's not to mention earnings catastrophes like seen at Meta Platforms. Meta is an epic falling knife. Some investors thought they were getting a steal, with shares down 13% from the S&P 500's high to low. But buying them was a costly mistake. Shares absolutely cratered following the dismal fourth-quarter results on Feb. 2. Meta's market valuation plunged by more than $232 billion in just one day. That's the biggest one-day drop in market value for any company in the history of the U.S. stock market. Ouch.

Now, Meta's shares are down an additional nearly 20% — from their already hammered level as of the S&P 500's low. So rather than getting a steal of the stock, dip buyers in Meta got burned by another 20%.

Nonetheless, investors are still taking lots of fliers on plunging stocks. They seem to figure they'll avoid the duds. But it's not as easy as it looks. Roughly 20% of the 711 S&P 1500 stocks to drop 10% or more from the S&P 500's recent high to low have fallen further. And some by a decent amount, as the average decline of these drops is nearly 4%.

That's notable as the S&P 500 itself is up that much from its low. And that's after falling nearly 10% from the high. Choosing the wrong dip to buy isn't the easy money some might think.

Burned By Buying The Dip

If you're looking for a cautionary tale of the risks of buying a dip, look no further than Tabula Rasa. The S&P Smallcap 600 company sells systems to help doctors manage prescriptions.

Shares probably looked cheap on the day the S&P 500 hit its low this year. Tabula Rasa's stock lost nearly 33% of its value from the Jan. 3 high, down to 10.59. But investors who dipped in then got pounded an additional nearly 15% when the stock dropped further from the low.

And it's not just less-known stocks that are punishing those trying to buy on the dip. Digital payments company PayPal is known for its top-notch management. And the stock's solid track record may have lassoed in buyers on Jan. 27 thinking the stock was cheap at 23% off. They soon found out, though, how cheap PayPal could get as shares quickly fell another 20.3% in the following days.

An S&P 500 Dip Stock That Sank

It's unclear if the S&P 500's final bottom is in. But history shows buying on the dip can be a risky proposition that could cost investors more than they thought they were saving.

Of the 54 leading stocks from 1997 to the crash in 2000, a majority either took many years to recover, or never came back at all, IBD data show. Microstrategy (MSTR), for instance, was a leading stock in 2000. But even two decades later, it's still down nearly 90% from where it was then.

Don't let dips tempt you into dead-money plays like that.

Buying These Dips Burned You

S&P 1500 stocks that have fallen further following a 20%+ drop from the S&P 500's recent high and low

Company	Symbol	Index	Initial % stock drop S&P 500 high to low*	Additional % change from low to now	Sector
PayPal Holdings	(PYPL)	S&P 500	-18.9%	-20.3%	Information Technology
Meta Platforms	(FB)	S&P 500	-13.0	-19.5	Communication Services
Pitney Bowes	(PBI)	S&P 600	-14.1	-17.6	Industrials
Vanda Pharmaceuticals	(VNDA)	S&P 600	-13.6	-15.9	Health Care
Tabula Rasa HealthCare	(TRHC)	S&P 600	-32.5	-14.6	Health Care
Liquidity Services	(LQDT)	S&P 600	-19.5	-12.6	Consumer Discretionary
CorVel	(CRVL)	S&P 600	-19.2	-11.5	Health Care
Monro	(MNRO)	S&P 600	-13.6	-10.8	Consumer Discretionary
S&P 500			-9.8	4.0