Regardless of which index we use – S&P 500, Dow or Nasdaq – the market continues to climb and make new highs. With this type of trajectory, we might assume that there are no bargains to be found. True? No, that is wrong.
While it may seem logical to believe that every stock has participated in the relentless uptrend, it is worth noting the action under the covers. On November 9, over 16%, or 82, of the stocks in the S&P are at least 15% below the high they hit in the first ten months of 2021. 53 stocks, or over 10% of the total, the index is 20% below its recent highs.
The table below illustrates this phenomenon by grouping all fallen stocks by industry in descending order of the average decline in their constituents.
For example, the worst group as of November 9th is communications services (down 32.8%), including names like Discovery (down 66%), ViacomCBS (down 65%), and several gaming stocks including Penn National and Las Vegas Sands who rebounded greatly when the excitement flared up again, only to slip when the virulence of the Covid Delta variant surfaced.
Sectors in the S&P 500
| Sectors | Number of 15% or more from S&P Co. from recent highs (January 1 to November 9) | Average of% change below recent high (January 1st - November 9th) |
|---|---|---|
| Communication services | 9 | -32.79% |
| Information technology | 17th | -25.41% |
| Finances | 2 | -25.27% |
| Cyclical consumption | 14th | -25.13% |
| Health care | 16 | -24.18% |
| Utilities | 4th | -22.76% |
| Consumer goods | 7th | -21.63% |
| materials | 5 | -21.50% |
| Industry | 8th | -19.04% |
| energy | - | - |
| Property | - | - |
| Total | 82 | -24.62% |
The list of all collapsing stocks covers a very wide range of industries. Tech names are taking the lead, with 17 companies down at least 15% from recent highs on Nov. 9, followed by Healthcare and Consumer Discretionary.
Energy, real estate and financials were the least affected, reflecting their status as the strongest sectors this year. The mix includes companies like Twitter, Intel, Moderna, Alaska Air (and most airlines), Clorox, Activision Blizzard, PayPal, and Kraft Heinz.
It's not uncommon for 16% of S&P stocks to be 15% below their current annual high in the last two months of the year. If we look at the past seven years, we find that the average “fallen” group is 130 names. These numbers are skewed by a few years, such as in 2020 when the market fell 34% from late February to March and many stocks never regained their starting-year status.
This year was unique because of the changing performance in growth and value stocks, which have changed leadership at least four times since January. (This lead changed four times based on the monthly cumulative data. Using the daily cumulative data, this lead changed 15 times.)
These moves have hit many stocks hard once their group gives up the lead after a sharp rally. Does it make sense to review the list for potential buying ideas after losing momentum in a developing leadership environment?
It is useful to examine how these depressive stocks will evolve over the next 12 months. The following table shows the performance of these stocks, which have fallen by at least 15% this year, and the price development for the following 12 months. Excluding 2019, the falling stocks outperformed the S&P the next year.
Falling stocks versus the S&P 500
| year | % Change in NTM stocks that have fallen (November 9th - November 9th) | % Change S&P 500 (November 9th - November 9th) |
|---|---|---|
| 2015 | 8.06% | 4.07% |
| 2016 | 22.73% | 19.48% |
| 2017 | 13.34% | 7.60% |
| 2018 | 13.66% | 11.22% |
| 2019 | 5.86% | 14.79% |
| 2020 | 60.21% | 31.96% |
The right strategy might be to review your stocks, which have fallen significantly this year, confirm that their earnings growth is intact, and make some selective purchases. The numbers are on your side.
Karen Firestone is chairman, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to contemporary wealth management for families, individuals and institutions.
