Should You Buy the Worst-Performing S&P 500 Stocks?

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The S&P 500 (^GSPC 0.57%) market index has seen some turbulence recently. The index as a whole is down 11% over the past six months, led lower by some of its biggest growth-stock stars.

The three worst performers on the S&P 500 since last November had been absolutely crushing the broader market in the five years leading up to that breaking point:

^SPX data by YCharts

Those are some game-changing returns. Netflix (NFLX 4.78%) and PayPal (PYPL 4.09%) outperformed the broader market three-fold in that period. Etsy (ETSY 4.16%) soared even higher, though it should be said that the homemade goods e-commerce specialist joined the public stock market as recently as 2015. PayPal and Netflix have been around much longer and were orders of magnitude larger than Etsy in 2016. You don’t have to be a math genius to realize that it’s easier to grow a small company fast than a large one.

Breaking bad

And then there’s that breaking point I mentioned, when investors everywhere backed away from higher-risk investments in the fall of 2021. Soaring growth stocks were suddenly out of rocket fuel. The three names in the preceding chart are now the three worst-performing S&P 500 stocks over the past six months. PayPal and Etsy are down by roughly 63% and Netflix took an even deeper cut of 72%.

That’s a mixed bag of returns in the long run. If you bought these stocks in November 2016, your Etsy holdings would still be up by an impressive 617% but PayPal gained only 113%, just ahead of the S&P 500’s 94% increase. And if you bought Netflix back then, you might wish you had just picked an index fund instead because that stock has only gained 58% in the same period:

^SPX data by YCharts

However, we are looking at three leaders in their chosen markets. These stocks are bound to bounce back — with a vengeance.

Image source: Getty Images.

Why these stocks are down — for a little while

Netflix’s biggest sin is a slowdown in subscriber additions, during the slowest season of each year. At the same time, the company has shifted its focus away from pure subscriber growth at any cost and toward generating beefy cash profits. You can’t convince me that this stock will stay down at multiyear lows for the rest of 2022. In my humble opinion, Netflix is the no-brainer buy of the decade right now.

PayPal’s story is similar to Netflix’s. Market makers focused on a lack of forecasting visibility as the digital payments expert paused its full-year guidance. I think it’s brave to the point of inanity to predict how 2022 results will shape up in the face of geopolitical tensions, raging inflation, worldwide manufacturing and shipping challenges, and more. Taking a break from longer-term guidance is just the right thing to do, and the e-commerce economy will still be around — and growing quickly — when the world goes back to normal again.

And what happens if you consider Etsy’s plunging stock chart in light of the company’s actual business growth? Here, I’ll show you:

ETSY data by YCharts

This company had 2 million online sellers before the pandemic started and 5 million in its latest business update. That does not look like a broken growth trend, but the start of a unique business for the long haul.

Some might say that PayPal and Etsy are just as tempting as Netflix right about now. You seriously can’t go wrong with any of these three top-quality growth stocks (but Netflix is still my top pick for you).