When you hear stats like the S&P 500 is up 10% for the year or the index has more than tripled off the 2009 low, it’s easy to take those figures at face value and move on. The return of the market in the past is what it is and you can’t change it. However, it can be instructive to look back, under the hood, at the drivers of those returns so that we can think about what might happen going forward.
For this article, I wanted to look at the stocks, industries and sectors adding to and detracting from the returns in the market over the past 12 years. Here are some observations I hope you’ll find both interesting and a bit educational.
Price vs. Total Return – The Importance of Dividends
From December 31st, 2008 to October 31st, 2020, the S&P 500 total return index is up 363.5%. But what many investors might not know is that a large part of that return is from dividends. The S&P 500 price index is up 262%. The dividends paid by companies in the S&P 500 have contributed to close to a third of the total return of the index over the past 12 years. Said another way, a $1,000,000 investment in the S&P 500 with dividends is would be worth $4.6 million today vs. $3.6 million if all you were getting was the price performance. Over time, dividends are an important component to the returns investors achieve.
Lots of Losers, A Few Big Winners
Another interesting observation is out of stocks we have performance on going back to 2008 (these are liquid, investable names, not micro-cap securities), close to 24%, or 511 individual stocks are down over that period.
| Over 10,000% | 1 | 0.05% |
| Between 5000% – 10,000% | 4 | 0.19% |
| Between 1000% – 5000% | 81 | 3.77% |
| Between 500% – 1000% | 175 | 8.15% |
| Between 100% – 500% | 785 | 36.55% |
| Between 0% – 100% | 591 | 27.51% |
| Between -99% to 0 | 511 | 23.79% |
Based on our data, there were 86 stocks, so about 4% of the total, that returned over 1,000% since the end of 2008. Of course, it’s some of the usual suspects, including some of the FAANGs, but many investors may not know that Domino’s Pizza has bested Amazon, the Boston Beer Company has outperformed Apple, and Pool Corp. beat Micron. Yes, technology names as a collective group put up some of the top returns (although not the best, see below), but there are some names in the top performing cohort that may surprise investors.
The return distribution is consistent with what you get in investing – a very small percentage of stocks can drive a lot of the returns. Charlie Munger once said, “if you remove just a few of Berkshire’s top investments, its long-term record is pretty average”. Finding these top performers is difficult and if you miss them you are likely to underperform. This is one of the advantages of buying something like the S&P 500 because you are likely to be in many of the best performers.
WHAT? Tech Is Not The Top Performer?
Most investors might think the technology sector is the best performer since late 2008, but it’s not. In our universe of stocks, the best performing sector since the end of 2008 is actually consumer cyclicals. Names like Lululemon, TRW Automotive, Tempur-Pedic, Deckers Outdoor, Helen of Troy and even Nike all put up massive returns. The average return in consumer cyclicals was 390% (while the median return was 184%) whereas in technology the average return was 387% (with a median return of 162%). The difference however is the technology sector has 350 individual names whereas the consumer cyclical sector has 85, so the number of tech firm is 4.5x that in the consumer cyclical space and tech accounts for a much larger portion of the market, so its returns have had a greater impact. The other important point to remember is the classification of stocks across sectors and industries can sometimes be tricky. Companies like Amazon and Netflix aren’t considered tech companies from a sector classification, something Kai Wu of Sparkline Capital recently discussed with us on our podcast.
Not All Industries Are Equal
In terms of the number of companies in our investable universe of 2100 companies, the industries with the most companies are:
- 99 in Real Estate Operations
- 85 in Biotech and Drugs
- 85 in Regional Banks
- 84 Semiconductor Firms
- 75 Oil and Gas Producers
It’s not until you get to the sixth industry, Software and Programming, that you see a top company (Microsoft) enter the picture. You can have a lot of companies in the market that come nowhere near the value of the top companies. For instance, Microsoft, which carries a 5.6% weighting in the S&P 500 and has a market cap of $1.62 trillion, is worth more than the entire basic materials and real estate sectors combined. Said another way, Microsoft is being valued more than the value of hundreds of other companies and more than multiple sectors combined.
The old adage, “It’s a Market of Stocks, Not a Stock Market”, has and always will be true. There is always much more going on beneath the surface, and by understanding these market dynamics and internals it can help investors better understand what has been driving and detracting from their returns. And the more you can understand things, the better off you’ll be in the long-run.
Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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