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The Macrodesiac Veteran has been diving into the S&P 500 again, rummaging through the goods, the bads, and the absolute dogs...

The S&P 500 is up by +25.0% ytd and by +31.16% over the last 52 weeks...

• Average gains for stocks within the index during 2021 come in at around +27.15%.
• 11 S&P 500 stocks that have racked up gains of more than +100% over that time frame.
• The index has posted 75 new highs during 2021 and 89 new peaks in the last 12 months

In fact, this might well be the best period that equity investors have ever known.

The chart below, which plots the S&P 500 index in black and its 50 month moving average in red over the last 20 years emphasises that point.

BUT...

What if I told you... there are stocks within the index that are down year to date despite the index averaging more than 7 new highs per month for the last 12 months.

During that same period, the average stock in the equity benchmark has posted 30 new highs.

Care to take a guess about the number of stocks within the S&P 500 that are down over the year to date?

10? 15? 20? Perhaps a few more at a pinch?

Nope.

17% of the index constituents are down YTD.

Yes, 87 members of the S&P 500 are in negative territory year to date and the average loss for those stocks is -11.16%.

This group, which comprises almost one-fifth of the index constituents has underperformed the benchmark by -36.0%.

A rising tide lifts all boats is a phrase that’s often been bandied about during the stimulus-driven equity rally since April 2020... (I have even used it myself)

Clearly, that has not been the case.

Let's drill further down into the data to find stocks that are not only down over the year to date or the last 12 months, but also down over a far longer period.

How about the last five years, a time frame during which the S&P 500 has more than doubled.

You may be surprised to discover that there are 20 stocks which have had negative performance over the year to date AND over the last 5 years...

Here they are:

Now if we look down the list we can see there are plenty of names from the worlds of leisure and travel which of course have been battered by Covid.

That may explain the near term underperformance.

So why are they down over a 5-year view?

Underperformance over that time frame, (which pre-dates Covid by 3 years) must strongly suggests they were in trouble long before we had even heard of the Coronavirus.

Regular readers may be aware that one of my favourite pieces of research is JP Morgan Asset Management’s 2014 note the Agony and the Ecstasy which looked at the risks and rewards of holding concentrated stock positions.

The note was aimed at founders and major shareholders in US businesses and was written to highlight two things within an equity portfolio:

1. The risks of concentration
2. The benefits of diversification

As part of that exercise, JPM looked back over the history of the Russell 3000 stock index.

JPM examined data that ran from 1980 to the end of 2013, and what they found was staggering 👇

The return on the median stock since its inception vs. an investment in the Russell 3000 Index was -54%.
Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.

### Risk of permanent impairment

Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent -70%+ decline from their peak value.
For Technology, Biotech and Metals & Mining, the numbers were considerably higher.

### 40% of all stocks have suffered a permanent 70%+ decline from their peak value

I have emboldened that statement because of how profound it is.

It tells us so much about the life cycle of stocks and financial Darwinism.

Midway down the list of those companies is a stock that can be described as a titan of corporate America.

IBM is now 110 years old. It was once the worlds most valuable business (1967) and effectively kick-started the company that now holds that title: Microsoft

The share price of IBM has declined over the last five years and in fact the over the last decade, a timeframe in which it’s lost -38.27%...

Take a look at the chart below: IBM versus MSFT over the last 10 years.

Sums up what’s been going wrong at big blue.

The next chart compares IBM revenues with those of Salesforce:

Salesforce is providing business services and database functionality to Enterprises and eating IBM’s lunch in doing so!

Now let look at a similar chart that plots Salesforce and Microsoft’s revenue trajectories over the last 16 years.

What about profitability ? Well, it’s a similar story as you can see below.

Now let’s be clear IBM isn’t going bust (any time soon)...

• Revenues of $73.0 billion per annum • Earns$8.69 per share on a trailing 12-month basis
• Even pays a dividend of  \$1.64 per share
• Annual dividend yield of 5.62% and so on...

BUT it's only made 15 new highs ytd and the current share price is -24.43% below the high water mark this year.

Somewhere over the last decade, (around 2013?) the stock lost its way and it’s still trying to find North on its business compass.

There's still hope of a big home run to turn their fortunes around...

However the longer IBM's stock is wandering around in the wilderness the less likely it is to find the path back out.

There are lessons for both executives and investors in the IBM story.