Wall Street's Dogs Are Still in the Pound

They usually have their day a year after a poor performance. Not so this time around.
Photographer: Matt Cardy/Getty Images

A number of Wall Street's worst performers of 2016 are about to put in a repeat poor performance.

Under Armour Inc.'s Class C shares, for instance, fell nearly 40 percent last year, making it the fourth-worst stock in the S&P 500. That gave the shares of the sports apparel company its lowest price-to-earnings ratio in three years, prompting some to predict a rebound. Tom Nikic, an analyst at Well Fargo, raised his rating on the stock in late 2016 to "outperform," which is the equivalent of a buy. Instead, Under Armour, which is down 54 percent this year, looks likely to stay on Wall Street's biggest-loser board, this time in the top spot.

And Under Armour isn't the only one disappointing investors for the second year in a row. Shares of travel website TripAdvisor Inc., the worst performing S&P 500 stock of 2016, are down an additional 25 percent this year. The stock of Botox maker Allergan Plc, which is facing more competition for its facelift alternative, has slumped an additional 20 percent this year after dropping by a third in 2016.

Typically, the market's biggest losers in one year have rebounded the next. A once-popular investment strategy called the Dogs of the Dow has routinely beaten the market when applied to the broader S&P 500. In 2016, for instance, the worst performers of the S&P 500 from the year before were up nearly 53 percent. Since 2010, the dog packs have staged an average rebound of 28 percent in the year after their poor performance. But this year it appears the dogs of the market are continuing to play dead. The 10 worst-performing stocks of 2016 in the S&P 500 are up just 1.5 percent this year, compared with 17 percent for the index overall.

That could be a worrying sign for even the market's best performers. Value strategies, which is what the dog investment approach is, have in general underperformed growth or momentum stocks for much of the past three years, but the outperformance has been particularly wide this year, up 25 percent for the S&P 500 Growth Index compared with just 13 percent for the Value Index. And that has typically been a bad sign for the market. Other periods in which growth stocks have far outperformed value stocks, like the one during the dot-com bubble, have ended badly. Bank of America recently labeled the stages of a bull market. The ones where momentum takes over are toward the end.

Still, the poor performance of the dogs may not be a sign the bull market is about to collapse. The growth of index funds has tempered the market's normal investor rotations. The biggest indexes, namely the S&P 500, are market-weighted. So as flows into index funds push up their largest members, those stocks get more and more of the dollars coming into the funds. The poor performers get less. And there are fewer active investors trying to take advantage of the potential stock market bargains. What's more, the so-called breadth of the market's rise this year -- the number of shares that have risen -- has been pretty wide, which is typically a good sign.

But the fact that the market's biggest losers have struggled this year could be sign that investors are giving up on taking risks on out-of-favor stocks, betting instead that what goes up will continue to go up. That bet works for only so long.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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