In the June 2012 issue of Investor Advisory Service, we wrote in our Investment Comments that U.S. companies had reported solid results during the recent “earnings season” and that stock valuations still looked reasonable. After a big run-up, the market had been choppy for most of two months. We said stocks remained under-owned by the average investor, and bonds were an unappealing substitute. We concluded our monthly Investment Comments with the following words:

The Federal Reserve’s commitment to keep short-term interest rates near zero through late 2014 encourages investors to look at equities due to the paltry opportunities in fixed income securities. The economy continues to expand at a steady, if underwhelming pace. We believe this supports our typical, cautiously optimistic stance toward the stock market.

In the last twelve months, the S&P 500 has gained 17%. Dividend stocks have done especially well during this run-up, suggesting investors could be turning to the stock market as a cash flow substitute for low-yielding bonds. Playing the market solely for dividends can be a risky strategy. After all, stocks carry a much higher risk of capital loss. In any given year, the capital gains or losses your investments show on paper are likely to swamp the dividends you receive. That said, we believe most investors allocate too small a fraction of their overall portfolio to equities. Considering the lack of alternatives in the bond market, investors looking for positive returns might be making the right call by turning to equities. The recent returns investors have enjoyed suggest the crowd isn’t necessarily always wrong.

While dividend stocks have been hot, the IAS is primarily a growth stock newsletter. Growth companies don’t typically pay high dividends. They use their cash flow to reinvest in growing the business. We prioritize factors like sales growth, earnings quality, free cash flow, and overall industry dynamics ahead of dividend yield when picking stocks to show to our subscribers.

When the growth case fails to materialize as hoped for, our picks usually don’t work out. In June 2012, one of the three stocks we highlighted was EMC Corporation (Ticker: EMC), a computer storage company whose management turned to an acquisition-heavy growth strategy when the storage industry stalled.

The company had a good story to tell. While competitors cut costs and focused on generating cash, EMC’s businesses, supplemented by acquisitions, continued to grow at double-digit rates. For investors, a lot of extra sizzle came from EMC’s majority ownership of virtualization software maker VMware, which trades separately under the ticker VMW. EMC paid over $600 million to buy VMware back when it was little more than an idea. That bet worked out spectacularly, and EMC spun out VMware as a separate company again in 2007. At its 2012 peak, VMware had a market capitalization of almost $50 billion, eight times what EMC paid back in 2004.

After our feature on EMC, however, the wheels seemed to fall off the growth story. EMC’s revenue growth slowed to a single-digit rate, then down to low single-digits, before rebounding slightly. Those trends weren’t disastrous, but they prompted a seemingly cheap stock to get even cheaper.

The real pain came in January 2013 when VMware laid an egg. VMW shares fell more than 20% in one day when the company announced a weak Q4 along with worse full-year 2013 guidance. On top of that, the company took a $100 million reorganization charge. Standalone EMC actually reported a reasonably good year-end quarter, but the pain at VMware was severe. EMC investors were relatively lucky to get past the news with only a small haircut to the share price.

VMware has not recovered since then, and neither has the parent EMC. At a recent price of $23, EMC has declined 13% since our feature. That’s especially poor performance considering the strength of the overall market. Competitors Seagate and Western Digital, who stuck to just making plain old computer storage, have outperformed EMC over one-, five-, and ten-year periods. We may have picked a lemon.

The other two stocks we highlighted in that issue of IAS, Genpact (Ticker: G) and Resmed (Ticker: RMD), did much better. Could EMC recover from here? Much depends on whether VMware weakens further. We continue to think that standalone EMC is an undervalued stock with interesting growth prospects, but the VMware investment that recently seemed like a blessing for growth investors is now looking more like an albatross.