(By Rich Bieglmeier) One of iStock's favorite hobbies is to read studies about stock selection, boring i know. However, for market watchers who want to learn the latest or just sharpen the saw as Dr. Stephen R. Covey endorses, the web offers endless academic and professional research.
Every week, we highlight research that we find interesting, follow the instructions and then relay our findings to you. Last week, we wrote about using Google find hints about the future direction of a company's stock price and earnings. We'll have a follow up soon.
While we mostly focus on stock selection strategies, today, iStock will emphasis a study that helps identify companies to avoid. The Winners Curse: Too Big To Succeed? written by Rob Arnott and Lillian Wu.
Arnott's and Wu's findings are as straightforward and simple as it gets, "For investors, Top Dog status—the #1 company, by market capitalization, in each sector or market—is dismayingly unattractive. We find a statistically significant tendency for top companies in each sector to underperform both the overall sector and the stock market as a whole."
In a previous study, the researchers found that 59% of Top Dogs trailed their underlying sector's return in the next 12 months, and twothirds underperformed for the next decade! Ouch. The average "glamour" market cap leading stock "in any sector underperforms the average stock (equally weighted) in its own sector by nearly 4% in the next year," and "the damage doesn't really slow down for at least a decade, as the Sector Top Dog lags its own sector by 3.2% per year for the next decade!"
The fate for the "National Top Dog" is even worse than sector leaders. According to the study, "the U.S. National Top Dog underperforms the average company in the U.S. stock market by an average of 5% per year, over the subsequent decade." Today, the NTD trophy goes to Apple Inc. (AAPL).
(While it may seem that way, I do not suffer from Malusdomesticaphobia, despite bagging on AAPL in consecutive stories.)
Money managers and investors who are interested in outperforming the market or specific sectors might consider The Winners Curse's advice to "leave out either the largest-cap company in the country or the largest in each sector" or "by leaving out all of the companies that have been sector leaders any time in the past 10 years."
As the song says, breaking up might be hard to do with sector Top Dogs. In the five years prior to achieving number one status, the leader dogs outperform. To make it easy for institutions and individual investors to write their Dear John letters, iStock broke out the trusty screener to identify the Top Dog in the following sectors.
National Top Dog: Apple Inc. (AAPL)
Consumer Staples: Nestle (NSRGY) US Based: Procter & Gamble Co. (PG)
Consumer Discretionary: Comcast Corporation (CMCSA)
Retail & Wholesale: Wal-Mart Stores Inc. (WMT)
Medical: Johnson & Johnson (JNJ)
Autos: Toyota Motor Corporation (TM) US based: Ford Motor Co. (F)
Basic Materials: BHP Billiton Ltd. (BHP) US based: E. I. du Pont de Nemours and Company (DD)
Industrial Products: Caterpillar Inc. (CAT)
Construction: VINCI S.A. (VCISY) US Based: The Sherwin-Williams Company (SHW)
Conglomerates: General Electric Company (GE)
Technology: Apple Inc. (AAPL)
Aerospace: The Boeing Company (BA)
Energy: Exxon Mobil Corporation (XOM)
Finance: Berkshire Hathaway Inc. (BRK-B) followed by Wells Fargo & Company (WFC)
Utilities & Telecom: AT&T, Inc. (T)
Transportation: United Parcel Service, Inc. (UPS)
Business Services: Visa, Inc. (V)