What it means
The word has two main uses in finance and business. The first is about performance: a laggard stock is one whose price has risen less, or fallen more, than similar companies or an index (a benchmark such as a stock market index).
The second is about adoption: in the technology adoption model, laggards are the final group to take up a new product. In a portfolio review, you identify laggards by comparing returns with a benchmark over the same period.
A stock that gained 4% when its sector gained 10% lagged by six percentage points. The question for the investor is then why, and whether the gap will close.
Some laggards are cheap for good reason, such as falling sales, weak management or heavy debt. Others lag only because the market has not yet noticed an improvement.
Value investors sometimes look for such laggards in the hope that they will catch up, but there is a risk that they are simply poor businesses. In the adoption sense, laggards are the people who resist change until they have no choice.
They are typically around the last 16% of a market to adopt an innovation, according to the well-known adoption model. They tend to be cautious, price-sensitive and sceptical of new ideas.
Understanding which meaning is in use avoids confusion in meetings. Fund managers talk about laggards when reviewing performance, while product and marketing teams talk about them when planning how long a product will take to reach the whole market.
Either way, the label describes position relative to others rather than quality in absolute terms. Laggards also appear in sector analysis.
When one part of a market rises sharply, other parts may lag behind and later catch up in a pattern known as rotation. Traders watch for this, but history shows that a lagging sector can stay behind for a long time, so patience and evidence matter more than hope.
In practice
Real-world examples.
Example
A portfolio manager reviews her holdings at year end and finds that a utility stock rose 3% while the utility index rose 9%. She marks it as a laggard and meets the company management to understand the gap. The meeting helps decide whether to hold, add or sell.
Example
A software company notices that a group of customers still uses a paper-based process. The product team treats them as laggards and offers extra training and a simple migration path rather than expecting them to switch quickly. This gentle approach prevents a loss of customers who might otherwise leave.
Example
A bank compares its digital banking take-up with competitors and finds it lags the industry by ten percentage points. The board approves extra investment in its mobile app. The plan includes a target to close half of the gap within two years.
Formula
Calculation
Relative performance = stock return - benchmark return
Worked example: a retail stock was bought at $50 and is now worth $52, while the retail sector index rose 10% over the same period.
Step 1: Stock return = (52 - 50) / 50 = 2 / 50 = 0.04, or 4%.
Step 2: Benchmark return = 10%.
Step 3: Relative performance = 4% - 10% = -6 percentage points.
The stock is a laggard, trailing its sector by 6 percentage points. On a $10,000 holding, that gap equals about $600 of missed gain (10,000 x 0.06 = 600).Case study
Seen in the real world.
Quayside Manufacturing is a fictional engineering firm whose shares had trailed the industry index by eight percentage points for two years. Investors blamed its slow adoption of automation, which kept costs above those of competitors.
A new chief financial officer built a business case for a $6 million investment in robotic assembly lines. She showed that the investment would pay for itself within four years through lower labour costs and fewer defects.
In this illustrative story, the share price started to recover within a year as margins improved, and the company moved from laggard to middle of the pack. The case shows that a laggard can improve, but only if the cause of the lag is understood and fixed. The board also set a clear target to close the gap with competitors within three years.
Watch out
Common mistakes.
- Buying a laggard simply because it is cheaper than its peers, without finding out why it has lagged.
- Comparing a stock with the wrong benchmark, which makes it look better or worse than it really is.
- Assuming every laggard customer is a lost cause, when many will adopt once the product is proven and easy to use.
Questions
People also ask.
What is a laggard stock?
It is a stock whose return is lower than that of its peers or its benchmark over a given period.
What is a laggard in technology adoption?
It is a member of the last group to adopt an innovation, typically the final 16% of the market.
Can a laggard become a leader?
Yes, if the business fixes the problems that caused it to lag, but it is not guaranteed.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related