Many investors worry about the potential for a prolonged bear market or a sudden stock market crash that could wipe out nearly half of their investment portfolio in just a few weeks or months. This is a very real possibility when looking at historical events, and many investors still have the thought of the COVID-19 stock market crash of 2020 fresh in their minds. While the overall market has been performing well in recent months, there are twelve S&P 500 stocks that have already experienced a painful 40% drop from their 52-week highs.
Matt Krantz, Investors Business Daily author, wrote, “A 40% decline is at least what it would take for the S&P 500's valuation to return to long-term averages, based on CAPE yields (a long-term expected returns gauge). ‘The extended valuations in the (tech) sector, and the general excitement around a new and unproven technology is more than enough to justify late 1990s dot-com bubble comparisons,’ said Ross Mayfield, investment strategy analyst at Baird Private Wealth Management.” This extended valuation, as discussed by Mayfield, has contributed to some of the notable 40% plus declines in certain stocks in recent months.
One notable name is Super Micro Computer (SMCI) falling over 41% from its recent highs in March. This drop isn't related to the companies' fundamentals but rather a pullback from an incredible run that started in January of this year. The stock surged from a mere $285 to a staggering $1,229 in just a few months due to the AI rally but has since retreated to around $690. Despite this pullback, the stock still has a Price to Earnings (P/E) ratio of 38, which is well above the S&P 500's mid to high 20s ratio. This highlights the previously extremely inflated valuation of the high-performance computing company. While this pullback is painful for many investors in SMCI, it's not the largest pullback seen among S&P 500 stocks.
That dubious honor goes to Walgreens Boots Alliance (WBA), which has seen a more than 62.5% drop since its highs last July. The company has struggled to compete with online rivals for prescriptions, which has severely impacted its earnings per share. These examples serve as a reminder of the volatility that a company—and by extension, its stock—can experience in a relatively short period of time. They highlight why it may sometimes be necessary to cut losses on underperforming positions. The following chart from S&P Global Market Intelligence and IBD highlights the twelve worst-performing companies in the S&P 500 based on their declines from their 52-week highs.
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