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:
Worse than peer group YTD:
Dropped from S&P 500 on December 23 2019:
And here are some performance statistics:
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:
#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.
#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.
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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