If Alan Creech drives a few miles from his downtown Milwaukee office, he can reach no fewer than seven Wal-Mart stores. Their brightly lit, boxy interiors, giant parking lots and upbeat motto, "Save money. Live better," all serve as an almost-inescapable reminder of one of the most vexing long-term investments the man has ever made.
Creech, who manages the $200 million Marshall Large-Cap Growth fund, bought Wal-Mart stock in 2004 and held on...and held on...and held on...as the retailing giant successfully navigated the long recession, increased its revenue by a staggering $150 billion and even doubled its earnings per share. And by the reckoning of nearly every Wall Street analyst who has covered the company over the past seven years, Creech's devotion was a smart move: As many as 13 pros had buy ratings on the stock in 2004, and a near-equal enthusiasm can be found among securities analysts in virtually every quarter since. (Only one of them, during this stretch, has slapped a SELL on the stock, according to Zacks Investment Research, and even then, the rating lasted a mere two months.) But for all that outspoken boosterism, Wal-Mart's shares, which were priced at about $50 when Creech first got in, never rose above $59, and these days, they're trading at $52 -- only 11 percent above the sticker price a full decade ago. "Every quarter, the company's earnings march up, and the stock goes nowhere," says Creech. "It's frustrating."
Michael Farr, a veteran money manager in Washington, D.C., uses the very same word to describe his experience with the stock of telecom-equipment maker Cisco Systems, which he has held for clients and which is down about 4 percent from its share price 10 years back. "It's been frustrating," says Farr, "particularly frustrating." Like Wal-Mart's, Cisco's earnings per share are up -- by more than 200 percent, in fact, from a decade ago. But such fundamentals haven't appeared to matter for the stock price, says Farr. Even the long bull-market rally that began in March 2009 didn't blow any lasting wind into the company's sails. Since the market's nadir that month, the much-followed Standard & Poor's 500-stock index has climbed more than 60 percent (even with the recent turbulence), and indexes following small and midsize stocks are up a bit more. But at some 16 bucks a share, Cisco is back to where it was at the broad market's bottom. (A Cisco spokesperson says the company is reducing costs and refocusing its businesses to recapture investor trust; representatives for Wal-Mart, meanwhile, say the company doesn't talk about its stock performance.)
There's no better investing insight than hindsight. That said, click below to see how big-name stocks in eight sectors have done in the past decade, compared with smaller rivals. Or, as many investors have put it, "Woulda, coulda, shoulda."
As it happens, Wall Streeters have an apt term -- one apart from frustration -- that captures what investors in these two venerable companies have been experiencing over the past several years: dead money. Stocks flatline for years, despite the occasional hope and sign of resurrection, and bury investor money in the process. And these days, what a lot of money it is. That's because the zombie bite has come not just to Cisco and Wal-Mart, but to a huge number of America's biggest and best-known companies. No fewer than 30 of the stocks in Standard & Poor's 100 index, for example, now have a share price that's lower than it was a decade ago. Another 11 stocks in the group have barely edged into positive territory, with annualized gains that haven't even kept up with inflation. Indeed, the current 10-year run for blue-chip stocks, according to researcher Ibbotson Associates, is the worst since 1968 to 1978.
Among the longtime laggards are the biggest-selling drug company in the world (Pfizer), the biggest chipmaker (Intel), the biggest industrial conglomerate (General Electric), the biggest software company (Microsoft) and the biggest biotech company (Amgen). Throw in a Big Three automaker (Ford), a media behemoth (Time Warner) and the top medical-device maker (Medtronic), and you get the picture: The losers are actually the leaders in a host of far-flung industries. They also just happen to be among the most widely held stocks in America. Retirement savers hold 'em, widows and orphans hold 'em and hundreds of large-cap mutual funds and ETFs hold 'em. Add up the market capitalizations of the 30 worst performers in this group, and the sheer scope of the dead-money pile becomes disappointingly clear: Individual and institutional investors are currently locking up more than $2 trillion in blue chips that have gone absolutely nowhere (or nowhere but down) for a decade.
It's not surprising when stocks of poorly performing firms stink. But the profits of these companies did quite well -- and they still disappointed long-term investors.
The biotech firm has quadrupled earnings in the past decade, but its share price suggests a lack of believers.
In March 2000, it was the most valuable company in the world by market cap. How times have changed.
No longer a low-cost PC leader? Tell that to founder Michael Dell: He's bought $250 million in stock over the past year.
Ford Motor (F)
The carmaker has rebounded of late -- but over the long haul, its share price hasn't.
The ups of this chipmaker's stock have been matched by its downs.
Shares have underperformed drugmakers as a whole. The sector is up 47% over the same period.
It launched Viagra and Lipitor in the '90s but few blockbusters since. Shareholders bet the new CEO will help.
Time Warner (TWX)
Shares of the media giant are worth less than half of their value from 10 years ago.
With 14 recent buy ratings and no sells, at least analysts are upbeat.
The truth is, such stocks don't have to shrink for their shareholders to lose money. There is, in fact, a huge opportunity cost attached to clinging to a long-languishing stock, because money tied up in zombies can't be put to work someplace else, says Bob Child, a financial adviser in Boca Raton, Fla., who manages about $80 million. Creech, whose Marshall fund has edged out the broad market in the past few years, has recited those "coulda, woulda, shouldas" with Wal-Mart dozens of times, he admits. If by some chance he had cashed in his Wal-Mart shares and bought rival discounter Costco in 2004 (up more than 100 percent since then), or perhaps that newfangled warehouser Amazon.com (up more than 300 percent), his fund shareholders would have done all the better.
But then Creech and other money managers concede something else as well: Even when they suspect a major stock holding is dead money, it can be awfully hard to head for the exits.
It wasn't that long ago -- the 1990s, actually -- when brokers and advisers actively encouraged investors to buy big-name stocks and then forget about it. The reasoning was simple: For decades, big-name stocks could do no wrong. From 1980 to 2000, the average annual return for the 100 biggest U.S. stocks was 62 percent. Sure, there were down years (1987 was mighty ugly), but someone who invested $10,000 in large stocks the year Ronald Reagan was elected president could have completely ignored stocks for 20 years and cashed out with nearly $125,000 the year George W. Bush was elected. That wasn't a fluke of the calendar, either. Indeed, during any 20-year period from 1970 to 2010, investors saw large-cap stocks' average annual return rise 13 percent. And as jaw-dropping as the returns were for a basket of big-name stocks, the returns for some individual names are all the more startling. Pfizer rose almost 4,000 percent from 1980 to 2000; Intel was up nearly 5,000 percent from 1986 to 2000.
As investors found out the hard way, however, buying and holding large U.S. stocks didn't work in the '00s. Anyone picking up large-cap stocks at the beginning of the decade was, more often than not, clobbered. As a group, the largest stocks lost, on average, 2 percent a year from 2001 to 2010. Some of the boldfaced winners of the 1980s and '90s -- Cisco, Pfizer, GE -- became the notorious losers of the decade that followed. Even when markets rallied, these stocks often only got back to their original values. Dividend payouts, which for many years had been a hallmark of large companies, dried up. Two asset bubbles, two recessions and a financial crisis certainly took their toll. By 2010 there were plenty of hedge fund traders, famed for their rapid buying and selling, who were happy to point out the failure of the old ways. Buying and holding "is just wrong -- the markets have evolved," says Simon Baker, who runs Baker Avenue Asset Management.
But the traditional sensibility of putting stocks in long-term storage isn't the only reason why so many managers have found themselves in the dead money -- and indeed, it may not even be the major one. Experts point out that many managers have no choice but to buy these stocks: There are only so many large-cap equities -- and a smaller number, obviously, in each sector or subsector. Take, for example, biotechnology. Many investors like buying biotechs, because once a drug hits it big, it can remain wildly profitable for years. However, in the mid-'00s, if a manager of a large-cap mutual fund wanted to own a large American biotech firm, he had but two options: Amgen and Gilead Sciences. There were then plenty of smaller but growing biotech stocks, such as Cephalon -- but adding smaller names carried another risk, managers say: having their fund no longer classified as a "large cap" fund by Morningstar, Lipper or another ratings firm. These classifications might not matter to individual investors, but they do to financial planners and pension plan administrators looking for a particular type of asset mix. For some big-time institutional investors, "if you are not in a certain-style box, they might fire you," says Charles Trzcinka, a finance professor at Indiana University.
Intellectual discipline often winds up keeping languishing stocks in the portfolio too. Managers -- particularly those who practice so-called value investing -- want to buy stocks that seem undervalued. It's one reason why many managers will salivate at a large, established company with growing profits but a shrinking stock price. If the stock keeps falling, they'll just buy more. Robert Zagunis has owned medical-technology firm Abbott Laboratories since 1992, when it was one of the original stocks in his now $4 billion Jensen Portfolio. Zagunis has bought and sold Abbott ever since, and it normally makes up at least 2 percent of his mutual fund's total assets. Since 2001, Abbott has more than doubled its annual profits, yet its stock price, while outpacing the broad market since then, has essentially remained flat. Rather than being disgusted, though, the Portland, Ore., manager actually likes that he can continually buy the stock. Investors would love to be able to buy a private company that was increasing profits like that, Zagunis says. But since Abbott is public, "you get a weekly, daily, even hourly reminder of what other people think," he says -- which makes the task of sticking to one's guns "more difficult." To be sure, while Zagunis's fund has averaged a 4.3 percent return over the past 10 years, it would have performed better with less Abbott stock. A spokesperson for Abbott says the stock has been "recognized as an attractive investment for its reliable dividend," which it has raised for 39 years straight.
Despite the pressure, Zagunis and others say they have no intention of abandoning the buy-and-hold strategy they've used for years. Investors get into trouble when they change their stripes or discipline, says Farr, who manages more than $700 million in client money for the firm Farr, Miller & Washington. "Every time I've seen someone I know do it, it's been the kiss of death," he says. Indeed, industry watchers say some fund managers might do well to take even larger positions in the dead-money stocks they truly believe in. That, as a matter of fact, is what Creech, of the Marshall fund, has been doing over the past year; he has cut the number of stocks he owns from about 70 to 50, and he has boosted his positions in several remaining large-company stocks -- including JPMorgan Chase, whose share price is down about 5 percent from a decade ago. "You have to be a double weight or not own a stock at all," he says.
Notably, however, he did finally throw in the towel this year on one of his longtime holdings: Wal-Mart. After seven years, the manager concluded that the retailer had become a "value trap" -- which is to say that while it looked like it could become a great stock, the odds weren't good that it ever would. "Wal-Mart hasn't moved out of a range in 10 years," Creech says. "When you think like that, it becomes very easy to unload."