The best performing stock in the S&P 500 this year was none other than Tesla, up an astounding 660%. Next in line were Etsy (+290%), Nvidia (+117%), L Brands (+115%) and PayPal (+114%). If you missed out on one (or all) of these winners this year, you might be wondering if it’s too late to get in. Will these winners keep on winning?
Buying the winners is called momentum investing. Contrarian investing, on the other hand, involves buying stocks currently out of favor (or in other words, the losers), in hopes of a rebound. In that vein, the worst performing stock in the S&P 500 this year was Carnival, down a whopping 57%. Next in line were Norwegian Cruise Lines, two energy companies (Occidental Petroleum and Marathon Oil) and United Airlines, all down more than 50%.
So which form of investing should you follow? In general, is an investor better off buying the winners or the losers?
The chart below shows the 2020 stock performance of 2019’s winners and losers. The results are clear: 2020 was a year for momentum investing. The 50 top performing stocks in the S&P 500 in 2019 outperformed again this year, returning 31%, versus just 8% for the 50 worst performing stocks in 2019. Similarly, the Top 10 stocks in 2019 soared again this year, up another 50%. The bottom 10 stocks in 2019 returned just 15% this year.
Will momentum investing reign again in 2021? While only time will tell, we wouldn’t bet on it. If there were ever a year to flip losers into winners, it would seem to be 2021, when the vaccine emerges and the pandemic finally ends. It’s possible this year’s biggest losers end up being at the top of next year’s list.
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