It may seem like a good thing for most other investors to agree with your top portfolio holdings, but over-ownership can be a real problem for popular stocks. In fact, three of the most over-owned stocks in the market, Apple (AAPL), Microsoft (MSFT) and General Electric (GE), are suffering from their extreme popularity.
Apple (AAPL)
AAPL is exceptional in many ways, and its widespread ownership is no exception. It may seem absurd, but so many investors and funds already own AAPL that there may be no buyers left.
Last year, TD Ameritrade released data on the most popular stocks across four different generations of investors. There were plenty of variations among the generations, but one thing was consistent: AAPL was the top holding of every single generation. Not only that, but AAPL was several times more popular than the number two stock owned by each generation.
Bernstein reported this week that AAPL remains one of the most crowded trades in the market. According to WhaleWisdom, which compiles 13F statistics, institutional investors currently hold more than $341 billion in AAPL stock. That’s more than any other stock.
Microsoft (MSFT)
MSFT comes in second on WhaleWisdom’s list with more than $321 billion in total institutional investment. Not only are AAPL and MSFT the top two stocks among institutional investors, institutions hold more than 51% more AAPL and MSFT than any other stock.
MSFT and AAPL were incredible investments if you bought them early enough. However, the trades are now extremely crowded, and the popularity of the stocks seems to be taking its toll on returns. In the past six months, AAPL is down 23.4% and MSFT is down 8.5%, both well below the -2% return of the S&P 500.
Given the huge investor interest in both stocks, lagging share prices shouldn’t be a surprise. Bernstein notes that the most widely-owned stocks tend to exhibit some unique trading behavior. First, they underperform during periods of overall market volatility. Second, they correlate with each other more than with the market as a whole. And finally, they react more negatively to negative news than they do positively to positive news.
A big part of this downside skew may have to do with the high expectations that the market inherently has for a stock that everyone seems to own. High expectations mean that the market is much more likely to be disappointed than pleasantly surprised.
General Electric (GE)
AAPL and MSFT are relative newcomers to the crowded trade club, but GE has been over-owned for decades. GE is one of the ten largest holdings by institutional investors ($164 billion worth), and is the only stock other than AAPL and MSFT to show up among the top 10 holdings of every single generation of investors.
Way back in 2000, GE was one of the three largest holdings of Fidelity, the largest mutual fund company in the U.S. How is that crowded GE trade working out? The stock has underperformed the S&P 500 in the past five years, 10 years, 20 years, and 30 years. In fact, in the past 20 years, GE has delivered an overall return of exactly -1.2%.
Is this the kind of return that AAPL and MSFT investors will be looking at 20 years from now? Only time will tell. But the more popular a stock becomes, the less likely it is to beat the market.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
