We are now roughly halfway through 2019, and it has been a record year for stocks. Coming into the end of June, the S&P 500 is up more than 17% year-to-date, marking the biggest year-to-date gain for the index through June since 1997, when stocks were up 21% year-to-date at this point in time.
But, not all stocks have rallied alongside the broader market in 2019. In the S&P 500, 73 stocks, or about 15% of the index, are down year-to-date; 33 stocks are down more than 10% year-to-date (7% of the index), 13 stocks are down more than 20% year-to-date (3% of the index) and six stocks are down more than 27% year-to-date (roughly 1% of the index).
In other words, while the stock market is off to its best year in over two decades, not all stocks have joined the party. Specifically, there are six S&P 500 stocks out there that have actually shed more than a quarter of their value this year.
Which stocks fall into that bottom 1% of the S&P 500? Let’s find out, and see where these massive under-performers are going next.
YTD Loss: 34%
The biggest loser in the S&P 500 so far in 2019 is generic pharmaceutical giant Mylan (NASDAQ:MYL).
MYL stock is down 34% year-to-date. This is nothing new. Since the start of 2018, the entire generic pharma industry has been under the regulatory microscope for price gouging. At the same time, competition has heated up. This dynamic of increased competitive and regulatory pressure has eroded Mylan’s pricing power. The result? The company’s revenues and profits in North America — its biggest operating segment — have been in free fall. The stock has similarly collapsed, dropping 60% since early 2018.
The bull thesis on MYL stock is that these competition and regulation headwinds will pass, and when they do, revenue and profit growth will return to the picture. Meanwhile, the stock is cheap enough today (4.1-times forward earnings) that renewed profit growth could spark a big rally. But, this all rests on the idea that competition and regulation headwinds will pass, and that profit erosion will end. That might happen. But, it’s not happening yet, and erosion has been the trend for so long, that the market won’t be convinced the headwinds are gone until they are actually gone.
As such, until the numbers here prove that current headwinds are moderating, MYL stock will likely remain depressed.
YTD Loss: 31%
The second worst performing stock in the S&P 500 this year is mall apparel retailer Gap (NYSE:GPS). As of this writing, GPS stock is down 31% year-to-date.
The big 2019 drop in GPS stock can be chalked up to deteriorating macro and micro fundamentals. On the macro front, all of mall retail broadly had a bad start to 2019, as consumer confidence slipped back, economic expansion slowed, and consumers more heavily leaned into e-commerce. At the same time, escalating trade tensions between the U.S. and China contributed to supply chain disruptions which dampened margins across the retail industry. Specific to Gap, against this ugly macro backdrop, the company reported very ugly first-quarter numbers that included negative comparable sales growth, gross margin compression, operating margin compression and negative profit growth.
This big YTD selloff in GPS stock seems slightly overdone. The stock now trades at 8.5-times forward earnings, which is an all-time low valuation for this stock. That anemic valuation would make sense if this company were looking at persistent profit erosion over the next few years. But, Gap’s earnings are actually projected to stabilize and even potentially rise over the next several years. As such, at just 8.5-times forward earnings, this stock looks too cheap for its own good. A recovery rally is imminent.
YTD Loss: 31%
Another mall retailer that finds itself on the list of worst-performing S&P 500 stocks of 2019 is Kohl’s (NYSE:KSS), with a YTD loss in excess of 30%.
Similar to Gap, the huge YTD loss in KSS stock can be attributed to deteriorating macro and micro fundamentals. As mentioned before, slowing global economic expansion, weakening consumer confidence and escalating trade tensions pinched retail sales and margins in the first quarter of 2019. Kohl’s was no exception. Kohl’s first-quarter numbers were shockingly bad, and included a sharp drop in comparable sales, gross margin compression, operating margin compression and a cut to the full-year profit guide.
Also similar to Gap, the big YTD drop in KSS stock seems overdone. Prior to last quarter’s lapse, Kohl’s had fired off multiple consecutive quarters of positive comparable sales growth and gross margin expansion. Thus, in the big picture, last quarter’s bad print was an anomaly. Going forward, Kohl’s will continue to leverage its unique off-price, off-mall positioning and partnerships with Amazon (NASDAQ:AMZN) to drive healthy profit growth. That healthy growth isn’t priced in today, with KSS stock trading at just 8.7-times forward earnings. Thus, the fundamentals imply that KSS stock is due for a bounce-back rally soon.
YTD Loss: 30%
The fourth worst-performing S&P 500 stock of 2019 is yet another mall retailer, Nordstrom (NYSE:JWN), with a year-to-date decline of 30%.
The story at Nordstrom is similar to the story at Gap and Kohl’s. The macro retail backdrop was ugly in the first quarter of 2019. Nordstrom’s numbers were likewise ugly against that backdrop. Comparable sales growth was sharply negative. Gross margins compressed. Operating margins fell back even more. Profits missed the mark. The full-year revenue and profit guides were cut.
But, most signs indicate that the first quarter’s weakness will be isolated to the first quarter. Broadly, in the first quarter, management botched the rollout of a new loyalty program, neglected digital marketing efforts and messed up merchandising. None of those headwinds should persist going forward. Loyalty program hiccups have been worked out. Management has re-upped its digital marketing efforts. Inventory decreased more than 5% in the quarter.
Overall, then, Nordstrom is well-positioned to report better numbers going forward. Those better numbers will converge on a discounted valuation (9.7-times forward earnings) to produce out-performance in JWN stock from today’s depressed levels.
Kraft Heinz (KHC)
YTD Loss: 29%
Coming in at fifth on this list of the worst-performing S&P 500 stocks of 2019, we have global snacking giant Kraft Heinz (NYSE:KHC). As of this writing, KHC stock is down 29% year-to-date.
The near-30% plunge in KHC stock in 2019 is nothing in the big picture. Relative to its early 2017 highs, KHC stock has fallen 70%. The culprit? Mismanagement. When Kraft and Heinz merged in 2015, the overarching goal from management was to cut costs rapidly to realize operational synergies between the two companies, and ultimately boost profits. In theory, that sounds good. But, in their obsession with cutting costs, management forgot to invest into growth-related areas. The result? Revenues dropped, and despite big cost reductions, profits fell, too, which sparked a big selloff in KHC stock.
The bull thesis here revolves around the fact that there is new management in place, and that the new management is less obsessed with cost-cutting, and more obsessed with organic growth. That’s the right go-forward strategy. At the same time, the company has largely put accounting errors in the rear-view mirror, and looks ready to get back to a more normal growth trajectory.
As such, KHC stock may be due for a recovery rally here.
YTD Loss: 27%
Of the six worst-performing S&P 500 stocks of 2019, four of them are mall retailers. The biggest mall retail loser in 2019 is Gap, followed by Kohl’s and Nordstrom. Rounding out the list is Macy’s (NYSE:M), with a year-to-date loss of 27%.
Much like its peers on this list, Macy’s reported not-so-great first-quarter numbers that included choppy top-line trends and margin compression. Against the backdrop of everyone in the retail industry reporting similarly poor early 2019 numbers, investors sold Macy’s stock in bunches. Now, the stock finds itself near five-year lows.
But, Macy’s actually reported positive comparable sales growth in the first quarter of 2019, alongside healthy double-digit digital sales growth. Management also maintained the company’s full-year revenue and profit guides. Thus, Macy’s actually had a better first quarter than its peers. Despite that, Macy’s stock trades at just 7-times forward earnings, which is both anemic on its face and small relative to other depressed retail stocks.
The implication? Macy’s stock is being unfairly beaten up, and sentiment has overshot to the downside. Sentiment will improve from here, and as it does, Macy’s stock should rebound.
As of this writing, Luke Lango was long KSS, AMZN, JWN and M.