When good deeds go wrong (part 2)

Good day. Embattled South Korean President Yoon Suk Yeol was contested by the country’s parliament over the weekend. The country’s main stock index, the Kospi, is now trading at roughly the same level as before Yoon shocked the nation and the world by declaring martial law. The saga is probably far from over, but Korean investors remain indifferent. Email us: robert.armstrong@ft.com and Aiden.reiter@ft.com.

Good Deeds Gone Bad, Part 2

a week ago wrote on the worst-performing stocks among US mega-caps over the past decade, a period of incredible returns for the group as a whole. A couple of patterns emerged. Several of the stocks were leading companies in industries that have undergone structural changes (media, money management, mall real estate); actors in structurally difficult industries (airlines, automobiles); pharmaceutical manufacturers who had been at the peak of the life cycle of their blockbuster drugs; or companies inundated by “transformational” mergers that were done in the wrong way. In one case, Boeing, management simply misplayed a good hand.

But that left a group of companies on the list of 25 underperformers (see list below) whose weak results I didn’t understand. So I called some analysts and got some answers.

Western falls squarely into the category of bad mergers. Less than a year before the pandemic, he went all out to buy rival oil company Anadarko in what an oil executive called the “dummiest deal in history.” The stock crashed in 2019, recovered in 2022, and has fallen since. If oil prices remain firm over the long term, the deal may end up looking sensible. But so far it has been a brutal increase. A volatile (at best) decade for oil prices also explains much of the oilfield services company’s weak performance. Schlumberger; all of his peers have also fought mightily. In the case of Schlumberger, I would call this an exogenous shock.

3M sells in industries that are growing at about the same GDP rateso it probably wouldn’t have been a great stock over the last ten years under the best of circumstances. But, as Deutsche Bank’s Nicole DeBlase explained to me, stocks had another burden to bear. 3M was a major manufacturer of PFAS or “forever” chemicals, which are increasingly the subject of legislation and regulation. the company is end PFAS production and has signed an important legal agreement settlement. Is 3M’s involvement in PFAS better categorized as a strategic mistake, or was it the realization of the dangers involved in an exogenous shock? I don’t know.

Universal Postal Union has struggled to adapt to the rise of e-commerce and the deluge of packages it has brought. That could fit into the group of companies that were overtaken by the shift in the industry (along with Disney, Intel, Franklin Resources and Simon Property). But, as with all these companies, there is a chance that management could have handled the change more competently. Bernstein’s outspoken and bracing David Vernon calls UPS and its peer FedEx “the worst-run duopoly in Western business history.” Their basic mistake, Vernon says, was assuming that they had extra capacity on their networks and could therefore charge Amazon and other e-commerce companies based on the marginal cost of delivering additional packages, rather than the average cost of delivery. grid. The result was bad deals in which “the package industry has subsidized the first 20 years of the e-commerce boom.”

The big name brand paper goods company. Kimberly Clark It fits, somewhat uncomfortably, into the category of companies that were affected by industrial change. It just hasn’t been a great decade for branded consumer goods; Colgate, for example, hasn’t been a great stock either. Smaller niche brands have become more popular with consumers, says Barclays’ Lauren Lieberman, even in diapers, Kimberly’s key category (they make Huggies). On top of that, investors became less interested in commodities like defensive stocks; “Tech companies became the new commodities,” he says.

The history of the casino operator. Las Vegas Arenas The lost decade is a bit complicated. It makes most of its money in Macau, the only region in China where casino gaming is allowed, and uncertainty over the regulatory/competitive environment has led to a persistent glut in the stock. The general question, of course: How should investors think about the unique risks of doing business in China? It’s hard to imagine anywhere in the world where Sands could have made as much money as he did in Macau. But live by the sword, die by the sword.

This taxonomy leaves several companies unranked from the list of underperformers between 2014 and 2024 (Kinder Morgan, Dominion, Lyondell, and US Bancorp). I have not yet been able to find a clear narrative in those cases; send an email with your opinions. But it is striking how the same themes arise again and again. Big mergers are dangerous. Incumbents are struggling intensely to adapt to structural change in the industry. Management capacity is no match for secular headwinds, whether oil prices or changes in the regulatory regime. And a little luck always helps.

Here’s the full list again (the 25 worst overall performers over the past ten years, among US companies that had a market capitalization of at least $35 billion at the start; excludes companies whose stock prices fell due to divestitures ):

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