Could Apple Inc. (AAPL) And Other 'Top Dogs' Be Destined To Underperform?

August 22, 2012 01:10 PM

Stocks: AAPL, BA, BRK.B, CAT, CMCSA, F, JNJ, NSRGY, PG, SHW, T, TM, UPS, V, WFC, XOM,

(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)

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Comments (2)


8/22/2012 5:29:39 PM History has other lessons, too by StonehamMel It's not just that you're a top dog that makes you vulnerable - it's how you got there. In looking over your list, Apple stands out from them all: Apple alone has grown by serial disruption. Nestle/P&G didn't. Comcast didn't. Wal-Mart, J&J, Boeing, etc. They had business models that proved superior in their markets. Apple could lose their disrupter status, of course. But if they do, intellectual sloth - not history - will more likely do them in. Reply Rating: (10) (2)
8/23/2012 10:22:52 AM by Jeff StonehamMel's comment is more insightful than the preceding article. This article succumbs to the same flawed logic that leads to a misunderstanding of "the law of large numbers". Just because something tends to happen does not mean it's going to happen. More importantly, this article misses the forest for the trees. Correlation is not causation: there is currently no indication that Apple will slow down. And it certainly won't slow down in the next decade simply because it is the most profitable company on earth now. Apple generates big profits, but it doesn't operate like a big company. It's lean and it pivots quickly. And that startup, bootstrapping attitude is instilled in all areas of the company. The result is that Apple is wholly a disruptive force - iMac (original), iPod, iPhone, iPad - each of these products successfully disrupted the entire market sector, undercutting incumbents and fundamentally changing consumer behavior. The only reason that Apple's growth will slow is if or when Apple stops being innovative. The iOS ecosystem is still in its infancy, and it will drive Apple for at least the next 5 years, but it would be a mistake to assume that Apple isn't fully willing (and capable) of supplanting iOS - and that it isn't working on those products and services right now. And I don't even need to mention Apple's contracted PE ratio. It's hardly a big company, if the definition of big, as you seem to imply, is a company that is slowing and is concurrently overvalued. Reply Rating: (3) (0)

8/22/2012 5:29:39 PM

History has other lessons, too by StonehamMel

It's not just that you're a top dog that makes you vulnerable - it's how you got there. In looking over your list, Apple stands out from them all: Apple alone has grown by serial disruption. Nestle/P&G didn't. Comcast didn't. Wal-Mart, J&J, Boeing, etc. They had business models that proved superior in their markets. Apple could lose their disrupter status, of course. But if they do, intellectual sloth - not history - will more likely do them in.

Rating: (10) (2)

8/23/2012 10:22:52 AM

by Jeff

StonehamMel's comment is more insightful than the preceding article. This article succumbs to the same flawed logic that leads to a misunderstanding of "the law of large numbers". Just because something tends to happen does not mean it's going to happen. More importantly, this article misses the forest for the trees. Correlation is not causation: there is currently no indication that Apple will slow down. And it certainly won't slow down in the next decade simply because it is the most profitable company on earth now. Apple generates big profits, but it doesn't operate like a big company. It's lean and it pivots quickly. And that startup, bootstrapping attitude is instilled in all areas of the company. The result is that Apple is wholly a disruptive force - iMac (original), iPod, iPhone, iPad - each of these products successfully disrupted the entire market sector, undercutting incumbents and fundamentally changing consumer behavior. The only reason that Apple's growth will slow is if or when Apple stops being innovative. The iOS ecosystem is still in its infancy, and it will drive Apple for at least the next 5 years, but it would be a mistake to assume that Apple isn't fully willing (and capable) of supplanting iOS - and that it isn't working on those products and services right now. And I don't even need to mention Apple's contracted PE ratio. It's hardly a big company, if the definition of big, as you seem to imply, is a company that is slowing and is concurrently overvalued.

Rating: (3) (0)

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