How the Worst Stocks of 2016 Are Making an Unusual Comeback

Stocks that turned in the worst first-half performance are among the top performers so far in the second half

Aug 18, 2016 at 1:24 PM
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Last month, Schaeffer's Senior Quantitative Analyst Rocky White took a look at how the S&P 500 Index (SPX) tends to perform in the second half of the year, based on its performance in the first half, the presidential cycle, and broad-market sentiment. Now that we're roughly seven weeks past the midpoint, the S&P has already gained a healthy 4% in the third quarter, tapping a series of record highs -- albeit extremely quietly -- along the way. Digging in deeper, however, White noticed an interesting trend among individual stocks: those that underperformed in the first half of this year are among the best performers so far in the second half.

In the table below, we see the components of the SPX and PowerShares QQQ Trust (QQQ) divided into quartiles by their first-half returns. 
As you can see, stocks that delivered the worst performances between January and June of this year -- losing between 74.5% and 7.9% over the period -- have easily given the best returns so far since July 1: 9.4%, on average, with 86.3% of these stocks positive in the second half. Going down the list, the same trend continues; the best performers in the first half of the year have generated the worst average return of 0.1%, with just 44.3% positive.

second half performance by quartile

What's even more intriguing, though, is that this is not a typical trend for stocks. Looking back to 2000, first-half underperformers (top quartile) have gone on to outshine the first-half outperformers (bottom quartile) during the second half of the year just four times before this year. Moreover, just seven weeks into the second half, 2016's first-half underperformers have already topped the first-half outperformers by a wider margin than we've seen ("Underperformance Difference"), at least in this millennium.

historical underperformers vs outperformers

It's also interesting to note that numerous names among the 2016 first-half underperformers also appear among the top performers in the second half of the year, historically. In fact, two of the worst performers in the first half of 2016 -- biotech firms Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) and Regeneron Pharmaceuticals Inc (NASDAQ:REGN) -- are not only among the top historical second-half performers, but have generated respective second-half 2016 returns of 14.6% and 18.4%, as of Tuesday's close.

worst first half stocks

Meanwhile, drugmaker Perrigo Company plc Ordinary Shares (NYSE:PRGO) and fertilizer stock CF Industries Holdings, Inc. (NYSE:CF) -- also among the worst performers of the first half of 2016 -- have yet to show positive returns in the second half. But history says that's likely to change before the year's end, with the stocks averaging second-half returns of 15% and 17.2%, respectively, over the last 10 years.

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