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Top Performing Large Stocks Tend to Change to Underperforming

Top Performing Large Stocks Tend to Change to Underperforming

December 2, 2020

Fama/French Total US Market Research Index 1927-2019 shows short-term stock appreciation growth has not been sustainable.

Firms that join the coveted Top 10 largest companies by market capitalization in the United States often do so because of tremendous growth.

Since 1927, for the three years prior to joining the Top 10 largest market capitalization companies, its stock values increased by nearly 25 per cent more per year than the general stock market.

Those companies get a lot of press coverage and are the envy of the business community. Shareholders are happy too.

How did the stock perform during the next three years?

Not very well. During the next three years those stocks outperformed the market by less than one per cent.

After five years those stocks underperformed the market by 1 per cent and after 10 years stock market underperformance was slightly higher. This is measured by the Fama/French Total US Market Research Index.

The technology giant Intel had a similar stock market performance. During the 10 years prior to ascending to the Top 10, its stock beat the underlying market by 29 per cent annually.

The following 10 years, Intel stock underperformed the market by nearly 6 per cent annually.

Same thing happened with Google. Five years after joining the Top 10 its stock value increases were about half of what it had been for the five years prior to joining the Top 10.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.