We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

Published: Jul 27, 2020 7 min read

Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.

Kiersten Essenpreis for Money

If you were the kickball team captain on the playground, you tried to pick the teammates who would help you win. If you’re an investor in the stock market, the strategy might have followed you into adulthood.

“Whether it's a hedge fund or new-to-market Robinhood traders, there’s a cult of trying to pick the winners,” says Ryan Giannotto, director of research at GraniteShares.

But he implements a different strategy: eliminate the losers. There are winners and losers across all sectors of the economy, and if you’re an index-fund investor, you’ll have both in your portfolio.

But for those who want to get a bit more specific in their stock picking, you might need to identify which companies are adapting to disruption, and which aren’t. After all, it’s much easier to figure out what holds a company back than it is to figure out if a company has a “secret sauce” that will make it successful, Giannotto says. And there’s a small number of stocks (e.g., Apple, Microsoft, Alphabet, Amazon.com and Facebook) that are carrying the market — you don’t want to exclude any of them.

“If you miss one of the winners, you’ve already lost,” Giannotto says. “It’s never been harder to try to pick winners because there are so few.”

What makes a loser?

The pandemic has upended the typical investing-during-a-recession playbook, but it’s made one thing especially clear: companies that can’t adapt to changing technology will fall behind. That’s not new, but the coronavirus has accelerated the impact of digital disruption.

“We got about seven years worth of disruption in three months,” Giannotto says. Before lagging companies were simply disadvantaged, he adds, “now they’re permanently impaired.”

His company offers the GraniteShares XOUT US Large Cap ETF, which includes half of the 500 largest U.S. companies in the market. It eliminates the “lagging” half of the 500 — those companies they find are the least prepared to react to digital disruption based on several factors including revenue, management and profitability. The ETF is outperforming the S&P 500 by 6.84 percentage points in 2020 so far, according to data from Morningstar.

To be sure, not everyone agrees with this strategy. There’s no way surefire way to identify long-term losers, which could cause you to miss out on a lot of potential return if you exclude the wrong stocks from your portfolio, says Mark Connely, a financial advisor with Wealth Design Group and Park Avenue Securities. And Warren Buffett and other top investors think buying and holding the broad market — the whole basket of winners and losers — is the best approach for everyday investors.

When companies don’t adapt, they die, Connely says. But, companies can surprise us with their adaptability. For example, sometimes people assume an energy company that uses fossil fuels may be hurt by the trend to invest in more environmentally-friendly companies, but those fossil fuel companies have a lot of money and can do a lot of research and can buy up other companies, he adds.

All the supply and demand — and the emotions and feelings people have about the future — are factored into those prices. Distressed value companies can often be opportunities, he adds.

“It's not as simple as which company is the better company, it’s which one gives you the better returns over the long run based on the stock price today," Connely says.

Some sectors are struggling

But if you do want to try to identify losers, start with sectors. Some have been hit hard by the coronavirus, and their futures are clouded in uncertainty.

That includes energy companies as people have been forced to stay home, causing the demand for oil to plummet. Giannotto says energy companies will continue to suffer post pandemic because “the big picture economy is undergoing a rethink.” Where we work and live and the types of energy we use are changing and traditional fossil fuels — whether through shipping, travel or power production — are being viewed as significantly less necessary than before, he adds.

Corporate real estate may also be a “loser” of the pandemic, says Tiffany Welka, financial advisor and accredited wealth management advisor at VFG Associates.

“There are so many businesses that have had to close down,” Welka says. “They may not be able to rent these buildings that they may have been renting previously.”

She says the industry won’t be “disabled” permanently, but might be for the next few years.

And some companies aren’t adapting

Just looking at the growth of e-commerce (which accelerated during the pandemic) shows this. Winners in the consumer sector, for example, will be companies that can “leverage strong e-commerce capabilities” while brick-and-mortar companies will see market share losses and store closures, UBS analysts said in a recent note.

In the food industry, you can look at Domino’s versus Yum! Brands, Giannotto says. The pizza giant has used its technology to implement contactless free carryout and delivery and its revenue rose 13.4% in the quarter ended June 14 from a year earlier. It’s eaten up some of the market share previously held by Pizza Hut (owned by Yum! Brands), whose largest U.S. franchisee recently filed for bankruptcy.

And in the apparel industry, LuluLemon has scaled digitally — turning the stores that closed due to the pandemic into ship from store locations — while other brands, like Under Armour, struggled digitally even before COVID-19.

“The whole point of leaving out losers is you don’t know who the next LuluLemon is going to be,” Giannotto says. “But you can take a look at who is failing to keep pace with digital disruption.”

More from Money:

Value Stocks Have Been Lagging Growth Stocks for Years. Here's Why You Should Own Them Anyway

What a Second Round of Coronavirus Lockdowns Would Mean for the Stock MarketInvestors Love 'Socially Responsible' Companies. But Sorting the Good from the Bad Is Harder Than It Looks

The Best Language Learning Software for 2020