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Market Update

The Best- and Worst-Performing Stocks: Q2 2022

Investors go on the defensive, leading to big gains for packaged-food stocks. Valuations cut in half for these technology and retail stocks, including Lyft and Snap.

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As economic uncertainty rattled markets, investors went on the defensive in the second quarter leading to big gains in sectors such as healthcare and consumer stocks. Among the worst performers were retailers and software companies as rising interest rates and growing fears of a recession tempered expectations for demand.

The quarter brought a reckoning for many stocks, with 758 of the 865 U.S.-listed stocks covered by Morningstar analysts falling. That was up from the 554 that were down in the prior quarter, and it was the most since the first quarter of 2020. Among those that declined, 301 stocks fell more than 20%, and 25 had more than half their market cap wiped out, including Bed Bath and Beyond (BBBY) and Coinbase (COIN).

Only 110 stocks on Morningstar’s U.S.-listed coverage list gained in the quarter, roughly versus 313 gainers during the first quarter of this year.

Just eight stocks gained 20% or more. U.S.-listed shares for Chinese companies such as New Oriental Education & Technology (EDU) and TAL Education Group (TAL) were the top performers.

Star Rating Changes

The large number of stocks with big declines in the second quarter resulted in widespread changes in Morningstar Star Ratings, which ranks stocks from 1 star to 5 stars based largely on valuations. Stocks with a 1-star rating are the most expensive, and stocks with 5-star ratings are considered undervalued.

In all, 485 stocks saw their star rating changed by 1 star or more compared with the start of the quarter, compared with a quarterly average of 151 for the prior 12 months.

Of those that saw a star rating change, 241, or 28%, of stocks fell into undervalued territory during the quarter, while only 26, or 3%, became overvalued.

Additionally, 42 stocks had a rating change by 2 stars or more, including building materials supplier James Hardie Industries (JHX), which swung to an undervalued 5-star stock from 2 stars, after falling 26.6% during the quarter. Moving in the opposite direction was Chinese agriculture focused e-commerce platform Pinduoduo (PDD), which rallied 54.1%, jumping into 2-star stock territory from 4 stars.

Which Stocks Performed the Best in the Second Quarter?

A table showing the best-performing stocks of Q2 in Morningstar's U.S.-listed coverage list.

Authorities relaxed regulations in early June, which led to New Oriental Education & Technology shares rising 77.0%, and TAL Education gaining 61.8% during the quarter. The companies have also made efforts to transform their businesses in response to strict regulations last year, and it has recently paid off. 

“New Oriental Education & Technology’s online education subsidiary Koolearn (01797) made very good progress in live commerce. The share price soared tenfold in June and investors are more optimistic on their transformation now,” Morningstar equity analyst Cheng Wang says. It is now considered a 3-star stock, trading close to its fair value estimate of $21.50 per share, while TAL Education is a 2-star stock.

An easing of regulations also benefited Pinduoduo shares, which rose 54.% and now trades as a 2-star stock.

Defensive stocks rallied as economic uncertainty spread across markets in the quarter. Among the largest gainers were packaged-food producers such as Treehouse Foods (THS), Pilgrims Pride (PPC), Lamb Weston (LW), and Post (POST), which all rallied 18% or more.

“During periods of economic uncertainty, food companies typically experience strong relative stock market performance, as food demand remains resilient regardless of economic conditions,” Morningstar equity analyst Rebecca Scheuneman says. “We generally see modest channel migration from restaurants to at-home eating, benefiting packaged-food companies in particular, such as Post Holdings and Treehouse Foods,” she says.

Of those four companies only Treehouse is considered undervalued, and is trading in the 4-star range even after rising 29.6% in the quarter.

A table showing long-term performance of the best-performing stocks of Q2.

Which Stocks Performed the Worst in the Second Quarter?

A table showing the worst-performing stocks during the second quarter in Morningstar's U.S.-listed coverage list
Shares of Bed Bath and Beyond plunged 77.94% in the wake of disappointing fourth- and first-quarter results. The company posted an earnings per share loss of $0.92 in the fourth quarter, which worsened in the first quarter to a loss of $2.83 per share. Sales declined by 25% in the first quarter, which led to Mark Tritton being removed as chief executive. Morningstar senior equity analyst Jaime Katz slashed her fair value estimate for the shares to $13.90 from the $23.50 estimate at the start of the quarter, and the company is viewed as a 5-star stock and is at a 66% discount.

“We expect efforts to emphasize extracting value from the brands in the portfolio through stronger sales and cost savings,” Katz wrote. “But such sentiment reads like a broken record, echoing efforts multiple management teams have articulated over the last five years, and we think this has turned into a show-me story.”

Other consumer cyclical stocks also tumbled including cruise lines Royal Caribbean Cruises (RCL), which dropped 58.33%, and Carnival Cruise Line (CCL), down 57.22%, as investors worry that another fall in demand, such as from a recession, could bankrupt the business, according to a Morgan Stanley analyst.

Despite this, Katz views both companies as significantly undervalued, with 5-star stock ratings following the losses. In the case of Carnival, Katz also anticipates record profits for 2023.

Shares of luxury resale retailer The RealReal (REAL) plunged 65.7% in the quarter. Morningstar equity analyst Sean Dunlop sees the firm’s struggles arising from consumer focusing their spending on food, fuel, and other necessities versus discretionary goods. Dunlop thinks investors are frustrated with the retailer’s recent struggles to find a path to operating profitability. Nonetheless, he views its shares as undervalued and trading at 5 stars.

Demand concerns and changing consumer behavior also hit home furnishing retailer Wayfair (W), which fell 60.7%. Another furniture seller, RH (RH), fell 33.9%, with the firm reducing its 2022 outlook for sales to a decline of 2% to 5% from its original view of flat to 2% growth in response to changing demand expectations. Both retailers trade in a 5-star price range.

“Higher interest rates were noted as the main culprit, with mortgage rates around twice last year’s levels acting as a drag on high priced home sales,” wrote Katz. The rising cost of homes is proving to be a headwind for demand.

Tech companies slid, with Coinbase (COIN) being the biggest decliner after falling 75.2% after various cryptocurrencies crashed during the quarter. Bitcoin was down 56.6%, and ethereum slid 67.5%. Shares of ride-hailing app Lyft (LYFT), Snapchat-owner Snap (SNAP), and cybersecurity firm Cloudflare (NET) all fell more than 60%, leaving them significantly undervalued. All are now considered 5-star stocks except for Cloudflare, which trades in 4-star territory.

A table showing long-term performance for the worst-performing stocks in the second quarter. 

Jakir Hossain does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.