Fortune 500 companies Outperform SP500 Companies by a Wide Margin - Can You Use this Amazing Claim?
We are always looking for a sure way to beat the market. Investors are flocking to index funds because managed funds simply do not “beat the market”.
This months Forture Magazine says you can do it. P. 36 shows a chart claiming equal amounts invested in the F500 at start of each year will beat the SP500. In the past 16 yrs this portfolio will be worth $5813 vs $2447 for the SP500. The article does not say if dividends are reinvested. Presumably taxes and fees are excluded.
Investing in the SP500 is easy today with scores of ETFs and mutual funds all with low fees. But I am unware of a fund that invests in the F500, with annual rotations of selling those off the list to those on the list.
As a simple, but not perfect way, we test this series I created a portfolio of stocks of companies in the F500 BUT not in the SP500. We know the companies that are in both lists will perform the same. It must be these stocks that Fortune includes in their list that are driving the performance higher.
With a little effort, I found that 177 companies in the June 15 edition of Fortune are NOT in the SP500. Call them "orphans". Of those, 23 are private companies, mutual insurance companies or companies that have bee sold or merged away. So my portfolio consists of the 154 companies that are listed on public exchanges.
The chart below shows how this portfolio or orphans (looking back of course) would have performed versus the SP500 companies with all dividends reinvested. My portfolio assume equal dollar investments today. The SPY is based on market cap weighted investments. I did not look at the SP500 equal weighted.
The chart is for the past 5 yrs using the Stock Rover program. It does show the F500 “orphans” have outperformed the SP500. But the higher returns are not as dramatic as reported by Fortune. During the 2015 decline the “orphans” fell much more than the SP500. This portfolio has a beta of about 1.13. Not shown are the 1 and 2 yr charts where the orphans are not doing much better than the SP500.
Until someone offers a “Fortune 500” ETF, it would not be practical for individual investors to build a portfolio with this many stocks and rotate it every June when Fortune published the new list .. based on last year’s data.
However, when I screened this list for stocks using my selection criteria, I did find some interesting stocks worth considering. This portfolio averages 1.8% dividend, and on average has grown dividends over 1, 3, 5 yr. periods. Most have reasonable forward P/E ratios. My conclusion: This is not the way to beat the market, but it is source of investment ideas you won’t find in the SP500 universe.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.