🗞 Carnage Under the AI Hood

Happy Sunday! 👋 

This week we’re taking a look at some of the market carnage currently being masked by the overall index performance. Specifically, 5 companies that are now in their largest drawdowns in decades.

Let’s dive in!

Carnage Under the AI Hood

The S&P 500 hit a new all-time high this week, putting the index up a healthy 13% year-to-date. To the casual observer or pure index investor, this probably looks like yet another great year for the market overall.

But for anyone who hasn’t had exposure to the top 10 holdings of the index, this year has likely looked starkly different.

134 stocks in the S&P 500 are now in more than a 40% drawdown from their all-time highs.

Now, Fiscal.ai’s pricing data goes back almost four decades, and 35 of these companies set their all-time highs prior to 2020, so not all are truly indicative of poor recent performance. But that leaves roughly 1 out of every 5 companies in the S&P 500 that are now down 40% or more from highs set in the last 6 years.

On a year-to-date basis, there are 132 companies now down more than 10%.

Of course it’s not abnormal for stocks to experience big drawdowns here and there, but keep in mind, these are supposed to be 500 of the biggest and best businesses in America. Most of these are very mature, well-established businesses with dozens of analysts covering their every move.

So it might be fair to assume that their stock prices would be pretty efficient, and therefore wouldn’t have such drastic moves, but this year has seen a major bifurcation between “AI winners” and everything else.

To that end, here are 5 mature, stalwart-type businesses (both inside and outside of the S&P 500) that are now at, or approaching, their largest drawdown in decades.

1. Hermès

Hermès is now in its largest drawdown of all time (-55% from highs).

The maker behind the famous $20,000+ Birkin Bags has experienced a major slowdown in revenue growth, particularly in Asia, where they generate more than half their revenue.

After this drawdown, Hermès now trades at an EV/EBIT of 18.9x, marking its lowest valuation in over a decade.

2. Pepsi

The beverage and snack food giant, Pepsi, is now down 36% from its 2023 highs, marking the company’s largest drop since the 2008 Financial Crisis.

Within its North American Beverage division (the largest revenue contributor), Pepsi has now reported 16 consecutive quarters of volume declines.

With the rise of weight-loss drugs putting a damper on growth expectations, Pepsi is now trading at its highest dividend yield ever (4.6%).

3. Zoetis

In 2012, Pfizer announced that it would be spinning off its industry-leading animal pharmaceuticals and diagnostics division into its own publicly traded entity, and giving it the name Zoetis.

For the 10 years after the spin-off Zoetis crushed the market generating a whopping 481% total return. However, increasing competition and a wave of litigation in recent years has resulted in many investors exiting their stakes.

Zoetis now trades at an EV/EBIT of 10.9x, compared to the ~30x earnings multiple they commanded for the decade prior.

4. Rollins

When you think of obvious AI losers, pest control probably wouldn’t be the first industry that comes to mind.

However, over the last couple of years, Rollins (the largest pest control company in North America) has seen a meaningful decline in digital leads from traditional SEO. This has resulted not only in a large deceleration of organic residential revenue growth, but also an uptick in sales and marketing expenses.

To be exact, over the last 6 quarters, selling and marketing expenses as a percentage of revenue have increased by 52 basis points, while organic residential revenue growth has dropped by 130 basis points.

In other words, every new customer is costing Rollins more and more. This new lead environment has forced investors to adjust their earnings growth expectations for Rollins. Shares of Rollins are now in their largest drawdown in 25 years (-51%) and trade at a decade-low valuation (EV/EBIT: 22x). 

5. Fair Isaac Corporation

For investors that have owned FICO for multiple decades, it probably would have felt inconceivable to think of a scenario that could result in as sharp of a drawdown as the 2008 housing crisis. But here we are.

Shares of FICO are now in their 2nd largest collapse of all time, behind only the GFC. This drawdown comes largely as a result of several targeted actions by the Federal Housing Finance Agency (FHFA) in response to FICO’s 1,000%+ price increases over the last 5 years.

These actions, which have included removing Fannie and Freddie’s FICO exclusive mandate and transitioning from the 3 credit score requirement to just 2, have left investors feeling shaky about FICO’s ongoing dominance in the credit scoring sector.

Despite the fact that FICO’s earnings have doubled over the last 3 years, shares are now down 29% over that same timeframe.

That’s all for this week. 

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