The Best Performing Companies Almost Always Fade, Analysis Finds

All too often, companies that have outperformed the market start to fade, no matter how wonderful their products or how talented their leaders. Apple is arguably a good example, although more clear cut cases include Sony and Yahoo.

Research issued by Boston Consulting Group shows that it is indeed hard to stay on top. Each year, the consultancy ranks the top ten value creators—large cap stocks that have generated the best total shareholder return. Performance is measured by using a combination of share price gains and dividend yield over a five-year period.

Of the 89 companies that have appeared in the top 10 since BCG started publishing the rankings in 1999, more than half appeared on the list just once. Only 19 companies, or 21%, were able to appear for three years or more.

“Over time, companies tend to fade to average market performance,” BCG senior partner Jeffrey Kotzen said. “To become a top value creator—the kind that wins a place in our top-10 rankings—a company must massively exceed investors’ expectations.”

Pharmaceutical companies dominated this year’s list, taking four of the 10 spots, including the top three. Regeneron Pharmaceuticals was first, followed by Allergen and Gilead Sciences. Other notable companies that made the cut included Visa, at number five, and Netflix, at number eight.

There are plenty of ways that CEOs can attempt to stay buoyant. Chief among them is investing profits back into R&D and talent to keep existing products competitive and explore new frontiers.

But BCG suggests that leaders may also want to consider taking a more active approach to portfolio management to reshape their businesses and start anew. In any case, it argues the need to map out potential divestments or spin-offs has never been greater, given the rise of activist investors.

“In our experience, many senior executive teams are comfortable with the businesses they currently own simply because they have “always” owned them,” BCG said. “They focus on being good operators of the current portfolio—running those businesses, making them better, and meeting plans—rather than savvy investors of corporate assets.”

Many of the companies that have consistently appeared in BCG’s top 10 list of value creators have put the continual reshaping of their portfolio at the center of their value creation strategies.

Bristol Myers Squibb, for example, consistently exceeded investor expectations, in part, by transforming itself from a diversified healthcare company into a biopharma specialist focused on treatments for afflictions including cancer, AIDS and cardiovascular disease.