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Is It Time to Buy the S&P 500's 4 Worst-Performing Stocks?

By Rich Duprey – Dec 14, 2021 at 6:03AM

Key Points

  • The broad market index is up over two times its historical average in 2021.
  • But four stocks have not participated in the rally.
  • Three of the four look like they may be good investments to pick up at these low prices.

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The broad market index's worst losers could be the biggest winners.

The S&P 500 has posted gains of over 25% so far this year, or more than double the historical average. It's part of a trend that has gone on since the end of the Great Recession in 2009.

If you ignore the sudden plunge the market experienced at the onset of the coronavirus pandemic last year, the stock market has been on an incredible years-long tear. The broad market index has quadrupled in value over that time period, turning an investment of $10,000 into one worth over $42,000 today.

Steeply falling chart marked in red pen.

Image source: Getty Images.

While that suggests it's only a matter of when, not if, the market crashes again, some stocks haven't participated in the rally this year. In fact, the four worst-performing stocks in the S&P 500 have lost an average of 39% this year. If there is a market downdraft coming, they might have already had all the wind sucked out of their sails, and won't fall much further.

Of course, we know that a stock can go all the way to zero -- so let's see whether these four stocks are bargains, or should still be avoided at all costs.

Family playing video games

Image source: Getty Images.

Activision Blizzard

It's actually not surprising that Activision Blizzard (ATVI 0.11%) has lost 36% of its value in 2021, as much of the video game industry is down on its heels this year. Zynga has lost a similar percentage, Take-Two Interactive is down 20%, and Electronic Arts is off 13%.

After a massive run-up in 2020 due to everyone taking up video games during the pandemic, the availability of out-of-home entertainment was naturally going to have the industry taking a breather.

Yet Activision has issues all its own to account for its outsized underperformance this year, notably allegations of fostering a hostile work environment, which it is currently being sued for. It's also spilling over into the performance of some of its top-selling titles, including World of Warcraft, Diablo, and Call of Duty

The legal distractions led to a suspension of any updates to World of Warcraft, while the lead designer and director of Diablo 4 left the company. Activision subsequently settled a separate lawsuit from the Equal Employment Opportunity Commission for $18 million, and CEO Bobby Kotick has been subpoenaed by the SEC, which is investigating workplace discrimination at the game maker.

Needless to say, Activision Blizzard is a bit of a mess these days, but these are issues that can be overcome. Because it owns such a powerful portfolio of games, its current valuation of 15 times next year's earnings and 16 times the free cash flow it produces makes it attractive, even if still not deeply discounted.

Wall Street sees some 66% upside in its stock after assigning it a consensus $97 per share price target, even if it will require some patience for the video game maker to achieve it.

Office worker working on a laptop

Image source: Getty Images.

Citrix Systems

Allowing employees to remotely access their work environments no matter where they are or how they do so was a boon to software provider Citrix Systems (CTXS) during the pandemic. The problem was that it thought the emergency short-term contracts it extended to its customers at a discounted rate could be converted to longer-term contracts after the crisis passed at a higher rate -- but that hasn't worked out as planned.

As much as telecommuting is still a big deal for many employers, it turns out that many businesses really did just want short-term workarounds and have failed to sign up for longer agreements. Citrix had assured investors the shortfall was a "very isolated item", only to later admit that the transition to the cloud had not been going as planned. It has since reported revenue and profits far below what was expected.

Companies also value stability, and having an executive succession plan in place so there are no surprises to concern the market. That's not what happened, though, after president and CEO David Henshall abruptly resigned for undisclosed reasons.

Despite Critix shares being down 37% year-to-date, the software company still carries a fairly high valuation. It trades at three times sales, five times its earnings growth rate, and over 27 times the free cash flow it produces. Investors might want to wait awhile on this software-as-a-service stock to see just how the dust settles.

Couple paying with mobile app

Image source: Getty Images.

Global Payments

The pandemic caused the global payments processing industry to evolve very rapidly in just a few months' time, and though Global Payments (GPN -1.14%) has been an industry leader, the changing face of the market could leave it behind.

Its quarterly earnings reports have been flattish and uninspiring, which has pressured the stock throughout 2021, bringing it down 41% year-to-date. That seems to be causing management to be willing to be bold again, as CEO Jeff Sloan told Reuters in October that he was ready to make another transformational acquisition similar to the company's $21 billion purchase of TSYS two years prior. It may be necessary in an industry that's becoming ever more competitive.

Even so, Wall Street thinks the market has it wrong on Global Payments and isn't adequately valuing its strong position in integrated payments and e-commerce. The fintech stock needs to prove it can continue gaining in merchant acquisition, which is why the time just might be ripe for a new big deal to be made that could boost the stock to over $200 a share, the consensus price target -- which would represent a 60% gain from its current level.

Sports fans cheering.

Image source: Getty Images.

Penn National Gaming

Penn National Gaming (PENN -0.14%) is the worst-performing stock in the S&P 500, also down 41% this year (and just edging out Global Payments by tenths of a percentage point). But not only is it down the most this year, it also holds the potential for the greatest returns, according to analysts, who peg it for 110% gains by assigning it a $105-per-share price target.

That's predicated on its partnership with Barstool Sports and the growth of sports betting, which has become one of the fastest-growing segments in the gambling industry. As more states authorize wagering on sporting events, Penn's partnership with the high-profile Barstool Sports should see it recover.

The problem has been that Penn was slow to enter into online gaming opportunities, including sports betting, and there is some question as to whether the Barstool Sports name is big enough to take on the current titans of the space such as FanDuel, DraftKings, and MGM Resorts' BetMGM.

Moreover, Penn was just shut out of the New York market after regulators approved just about everyone else to participate. Although next-door New Jersey is the country's biggest sports betting market at the moment -- Penn is just getting into that state through Barstool -- New York could supersede its importance once it goes live.

Being slow to embrace online gaming and then not moving fast enough to capture share could ultimately limit its potential. Even so, having fallen so far in 2021, it does seem there is plenty of potential for strong gains in the betting names.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Activision Blizzard, Take-Two Interactive, and Zynga. The Motley Fool recommends Electronic Arts 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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