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February
11
2020

Just 4 Companies Account For 67% Of The S&P 500’s YTD Returns
Nick Colas

In mid-December 2019 we published a list of the 11 worst performing names in the S&P 500. The purpose of that exercise was twofold. First, buying the laggards at the end of a calendar year into tax loss selling anticipating a bounce in the New Year is a common hedge fund strategy – a turbo-charged play on the January Effect. Second, any big loser that does not rally once that selling stops is in real trouble.

Here is how the stocks on that list have done in 2020 versus their respective sectors, noting 2 names that were taken out of the S&P 500 before year end 2019.

Better than peer group YTD:

• Gap Inc. (GPS): +1.0%, versus -4.6% for the S&P Retail sector
• L Brands (LB): +30.1%
• Macy’s (M): -3.5%
• Occidental Petroleum (OXY): +1.7%, versus -10.1% for the S&P Energy Sector
• Mylan (MYL): +13.3%, versus +1.2% for the S&P Health Care Sector
• Abiomed (ABMD): +9.6%

Worse than peer group YTD:

• Mosaic (MOS): -6.4%, versus -2.2% for S&P Materials
• Kraft Heinz (KHC): -8.1%, versus +2.0% for the S&P Consumer Staples sector
• Alliance Data Systems (ADS): -5.6%, versus +8.8% for the S&P Tech sector

Dropped from S&P 500 on December 23 2019:

• Trip Adviser (TRIP): -4.9%
• Macerich (MAC): -13.2%

And here are some performance statistics:

• Average (all 11 names): +1.3% YTD
• Average of 9 names still in the S&P 500: +2.2%
• S&P 500: +3.0%
• S&P 500 Equal Weight: +0.8%

Finally, here are 3 investment takeaways from this data:

#1: It is a case study in the challenges of being a value investor. Buying tax loss sale candidates at the end of a year is a tried-and-true approach to bottom feeding. Even though this strategy has beaten the equal-weight S&P in 2020, it lags the market cap weighted version of the index.

Why? Because 4 super-cap names are more than 60% of the S&P 500’s returns YTD:

• Microsoft: 28% of the S&P’s gains this year
• Apple: 15%
• Amazon: 13%
• Google: 11%
• Total: 67% of the S&P 500’s YTD return

#2: After a lull in Q3 2019, the “Momentum” factor is once again working. And since by definition 2019’s laggards are nowhere near qualifying, they are at an obvious disadvantage.

• The MSCI Momentum Index is +6.1% in 2020, more than double the S&P 500’s YTD return.
• This phenomenon goes beyond Tech sector names (24% of the Index). Rate sensitive groups have a 24% weight as well: Utilities (13%) and Real Estate (11%).
• The top 10 names in the Momentum Index are Microsoft (MSFT, 5.7% weight), Visa (V, 5.2%), MasterCard (MA, 4.9%), Proctor & Gamble (PG, 4.8%), AT&T (T, 4.5%), Nextera (NEE, 3.6%), Medtronic (MDT, 2.9%), Costco (COST, 2.5%), American Tower (AMT, 2.0%) and Thermo Fisher (TMO, 1.8%).

#3: All this supports the argument we outlined last week that investors are adding risk to stock portfolios to offset their simultaneous reduction in overall equity exposure.

• US fund investors have been selling domestic stocks for years while upping their bond exposure.
• To keep their overall portfolio expected return unchanged, they have increasingly over-weighted high growth sectors (read super-cap Tech) and Momentum (a proven if higher risk strategy).
• Names that have been left for dead by equity markets – such as our 2019 losers list – have no place in such a portfolio, which needs to keep a resolute eye on +1.0 beta names with a track record of growth and good equity market performance.

Summing up: the 2019 losers list hasn’t done badly in 2020, but neither has it seen real outperformance this year because stock prices are moving on larger macro factors. A warning, in other words, to treat broken sectors and individual stocks with real caution just now.

Nick Colas started his finance career in 1991 as a senior equity analyst at Credit Suisse, worked directly for Steve Cohen at SAC Capital, and has been a widely followed market strategist for +14 years. He was the first person on Wall Street to cover bitcoin (2013), appears regularly on CNBC and Bloomberg, and is widely quoted in the financial press.

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