MW 'Magnificent Seven' investors better hope the stocks don't end like the movie

By Mark Hulbert

'Top dog' stocks can fall hard - as shareholders of the 'GRANOLAS' discovered

'Whoever coined the expression "Magnificent Seven" for these companies presumably didn't see the movie.' Robert Arnott, stock-market strategist

Remember those stock-market favorites that went by the cute acronym "GRANOLAS?" Thought not. These former highfliers can teach us a lot about what too often happens to investors when they're convinced that winners will just keep winning.

The GRANOLAS were Europe's answer to the "Magnificent Seven" stocks in the U.S. This time last year, the GRANOLAS were riding high - Goldman Sachs, which was responsible for creating the grouping and the name, reported that 60% of the European stock market's gains over the prior two years had been produced by these 11 companies. Since then, these stocks on average have barely made any money for a dollar-denominated investor.

The GRANOLAS are:

-- GSK UK:GSK GSK

-- Roche CH:ROG RHHBY

-- ASML NL:ASML ASML

-- Nestle CH:NESN NSRGY

-- Novartis CH:NOVN NVS

-- Novo Nordisk DK:NOVO.B NVO

-- L'Oreal FR:OR LRLCY

-- LVMH Moët Hennessy Louis Vuitton FR:MC LVMUY

-- AstraZeneca UK:AZN AZN

-- SAP XE:SAP SAP

-- Sanofi FR:SAN SNY

Over the past 12 months, these stocks have produced an average U.S. dollar-denominated total return of 1.9%, according to FactSet data. Over the same period, in contrast, the Vanguard FTSE Europe ETF VGK, which is benchmarked to the FTSE Developed Europe All Cap Index, produced a dollar-denominated total return of 12.3%.

Though a fall from grace is all too common when investing, it's something we are nevertheless quick to forget. The GRANOLAS are just one recent example, but the pattern is universal. Consider a study conducted by Robert Arnott of Research Affiliates into U.S. stocks that are, at any given time, the "#1 company, by market capitalization, in each sector" -companies he calls "Top Dogs." Arnott found that, subsequent to these companies attaining top status, they on average lagged behind their sector peers over the next one-, three-, five- and 10-year periods - by between 3.0% and 4.0%, annualized.

In a subsequent study that examined the Top Dog stocks in non-U.S. markets, Arnott found "the same phenomenon in each and every market, with no exceptions. Indeed, outside the United States, the ... Top Dogs generally underperform their own sector even more relentlessly than in the U.S."

The investment implication is clear: Be skeptical of stocks that have ridden a wave of popularity to become the largest in their sectors. The odds that they will underperform are high.

Investors in the Magnificent Seven stocks, take note. As Arnott wrote in an email: "Whoever coined the expression 'Magnificent Seven' for these companies presumably didn't see the movie, where four of the seven are dead by the end of the film."

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: The 'next important test for AI bulls' happens this week with Nvidia's earnings

Plus: U.S. stocks are near record highs. Why are investors so worried?

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 24, 2025 07:30 ET (12:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.