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Is It Time to Buy 7 of the S&P 500's Worst-Performing Stocks of 2021?

By James Brumley – Dec 6, 2021 at 8:33AM

Key Points

  • Pandemic-driven demand actually emboldened the video game industry's smaller, lesser-known names.
  • Cable television content suppliers are seen by some as victims of cord-cutting, but most have already prepared for the future.
  • Casinos have been slow to recover from the pandemic, but there's a light at the end of the tunnel.

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Before scooping up these names just because they're cheaper than they were a year ago, consider what prompted their sell-offs in the first place.

The S&P 500 (^GSPC 0.56%) may be up a healthy 21% for the year so far, but don't jump to sweeping conclusions about that bullish run. As of Dec. 3, more than 100 of the index's 500 names are actually in the red. Many of them are way down since the end of 2020.

This is of course great news for some bargain-hungry investors. After all, it feels risky and even a little uncomfortable to step into names that are at or near record highs.

Before plowing into some of these stocks just because they seem less likely to suffer a pullback, take the time to do your homework. Some of these names are down for a reason, even if others are due for a rebound.

The biggest losers

As is usually the case, several of the S&P 500's laggards are down due to sheer volatility stemming from incredibly unusual circumstances. For instance, Global Payments is leading the bearish charge of the S&P 500's losers with a year-to-date loss of 43%. That weakness isn't the result of poor fiscal performance -- this year's sales and earnings are on pace to grow 15% and 28%, respectively. Rather, this year's weakness can mostly be chalked up to assumptions the payments space is evolving in a way that displaces the company.

Most of this year's biggest losers within the S&P 500 are in the red as part of a bigger theme. This is where investors can find real opportunity as these broad themes are easier to get a grip on.

Take video game stocks as an example. Take-Two Interactive (TTWO 0.55%) is off 22% year to date, while shares of rival Activision Blizzard (ATVI 5.91%) are down 38%. Both companies are victims of too much success last year when pandemic-driven lockdowns left the world starved for any sort of at-home entertainment -- many turned to video games to fill the void.

Take-Two is indeed on pace to report weaker full-year top and bottom lines. It's also worth noting Activision Blizzard's management team has been caught up in a harassment controversy that leaves the company's leadership in question, although the stock has been falling most of the year. Not only are consumers finding other diversions as lockdowns ease, most entertainment-oriented companies got very, very good at their businesses in the past year and a half.

An investor sitting in front of a laptop, considering a purchase.

Image source: Getty Images.

Another obvious theme among the S&P 500's worst-performing stocks is the continued weakness of the gambling industry. Wynn Resorts (WYNN 0.36%) shares were down 29% for the year as of Friday, while Penn National Gaming (PENN 1.16%) and Las Vegas Sands (LVS -0.69%) are down a respective 44% and 43% year to date. Although the world is starting to travel for fun again, casinos aren't the compelling draw they were as recently as 2019. Notably, Las Vegas Sands missed last quarter's revenue as well as earnings estimates. It's certainly not helping matters that China's sweeping crackdown on several sectors included casinos, posing a risk to the industry's all-important exposure to Macao.

Finally, cable television players ViacomCBS (PARA -2.46%) (PARA.A -2.48%) and Discovery (DISCA) (DISCK) have watched their stocks fall 17% and 20% year to date, respectively. Granted, both stocks soared in 2020 as investors aggressively speculated each company would thrive while folks were stuck at home sheltering from COVID-19. But a pullback was inevitable -- both of these stocks were completely upended by sharp selling done by Archegos Capital Management when the money manager was forced to liquidate its position in the two stocks in March to meet a margin call. While that drama has run its course, Discovery and ViacomCBS shares have continued to drift lower in the meantime.

Picking and choosing

The question remains: Are these steep setbacks a buying opportunity? As always, it depends.

The two television names and some of their peers are worth stepping into. The continued weakness is at least partially attributable to the shell shock from their drubbings earlier this year. The market may also be concerned the ongoing evolution of the TV business favors streaming over cable TV. Investors appear to be looking past the fact ViacomCBS and Discovery are streaming players in their own right. ViacomCBS is the name behind PlutoTV, which is now 54 million regular viewers strong. That's in addition to its 47 million paying streaming customers. Discovery now serves over 20 million direct-to-consumer customers after launching its flagship streaming service less than a year ago.

Casino stocks like Wynn and Las Vegas Sands are a bit trickier to handicap.

Obviously the arrival of the omicron variant rekindles concerns about traveling, but pandemic fatigue is slowly but surely pushing consumers not to care. The rise of legalized sports gambling also presents an incredible opportunity for these companies. Market research outfit Technavio estimates this sliver of the betting market alone is set to grow at an annualized pace of 10% through 2024. The challenge is just the timing of any trades -- casino stocks may have more downside to dish out before bottoming out. The best any investor can do is add them to a watch list and check in on a regular basis.

The only two that are decidedly not a buy right now are the video game stocks Take-Two and Activision Blizzard.

That's not to suggest these companies are poor holdings if you happen to own them (particularly if selling would incur a tax consequence you're not ready to deal with just yet). But the ever-evolving video game market continues to change in ways that don't necessarily favor the industry's historical stalwarts. Gaming industry research outfit NewZoo estimates the market will shrink slightly this year after an incredible 2020, and though it should start growing again next year, Technavio says the market is becoming increasingly fragmented. More independent publishers, several game consoles, and an increasing number of ways to sell titles to gamers all chip away at the dominance of the industry's old-guard companies.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Discovery (C shares) and recommends the following options: long January 2023 $115 calls on Take-Two Interactive. The Motley Fool has a disclosure policy.

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