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When you are forced to own the loser stocks
Investors using an S&P 500 ETF to index have no choice but to own 250 COVID “loser” stocks.
Take a look at this chart below published by Ned Davis Research on May 15th. Essentially what they did was classify each stock in the S&P 500 as a COVID “winner”, “loser”, or “neutral” based on how much impact the halted economy had on each company. Obviously, “winners” were the companies who were positively impacted by COVID…think Clorox (CLX). The “losers” were, well, losers…think Carnival Cruise Lines (CCL).
On a market-capitalization basis, winners make up 57.73% of the S&P 500’s market-cap, while only making up 33% of the total number of stocks, and only experiencing a -6.14% loss from February 19th through May 12th of this year.
Conversely, the loser stocks make up 30.96% of the S&P 500’s market-cap, 48.92% of the total number of stocks, and have experienced a -33.41% loss from February 19th through May 12th of this year.
Because the S&P 500 is a market-cap weighted index (the largest companies have the biggest impact on the underlying index level), the performance of the large companies is helping the index from declining – so the index does not look as bad as it actually is on a stock-by-stock basis.
If you think that we’ll quickly go back to the old, pre-COVID days, then this won’t be a big deal.
But to me, that’s a tough sell – just think through what flying will look like in the future. With all the lines and social distancing, arriving two hours before a flight will seem like a LUXURY!
As I’ve said before, I’m optimistic that we will one day emerge from this crisis and get the economy back on track…but there will be new industries, new companies and new winners. Meanwhile, those COVID losers, well, they are probably going to stay losers for a while, if not forever.
And no one will want to own the loser stocks, so I suspect this will bring back some interest in active investment management along with advisors who blend together rules-based individual stock portfolios, ETFs, and tax loss harvesting.
Keep looking forward,
Dave
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
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