History Says Palantir Stock Has a 79% Chance of Dropping 25% or More Within a Year

When artificial intelligence (AI)-powered data analyst Palantir Technologies (NYSE: PLTR) joined the S&P 500 on Sept. 23, investors cheered. The stock's price has risen more than 50% since then, including a huge jump the day after the Nov. 5 national election.

Can it last?

Some investors believe that S&P 500 membership gives stocks a floor: a baseline of support among index funds and other institutional ownership, which helps protect their investment. I wanted to see if that was true. What I found was truly shocking, and has serious implications for Palantir in the coming year. It also offers some hope to investors who worry they've missed the boat on this hot AI stock.

Crashing through the floor

I looked at the 14 stocks that joined the S&P 500 between one and two years ago (so, Nov. 14, 2022, to Nov. 14, 2023), and tracked their prices for the year following their official induction, and if there was a "floor," it seemed to be well below their closing price on the day they officially joined the S&P 500 (I'll call this their "induction price").

During the year following their S&P 500 induction, all 14 stocks experienced at least one drop below their induction price. The size of the drop varied widely. Outperforming fintech company Fair Isaac only dropped 1.5%, while Insulet Corp. had a stomach-churning 58.5% tumble. Ultimately, 11 of the 14 stocks, or 79%, experienced at least one drop to 10% or more below their induction price in that first year. Those drops are boldfaced in the center column below:

Notes: * The percentage change marks the deepest drop since the induction date. Boldfaced figures are those that dropped 10% or more. ** Marks the percentage change from the induction date.

Besides Fair Isaac, only two companies avoided a double-digit percentage drop: spinoff GE HealthCare dropped 4% and industrial electrical components manufacturer Hubbell fell roughly 6%. Seven stocks (more than half of the inductees) saw a drop of 20% or more.

So, if you're wondering whether you've permanently missed the boat on Palantir, history suggests you might see a buying opportunity soon.

Not just cherry-picking

Was this just a particularly bad year for S&P inductees? Sadly, no. There are similar trends in other recent years.

In 2022, for example, the S&P 500 index dropped nearly 20% as a whole, sweeping most member companies along with it. Recent additions have fared no better: Erie Indemnity, an insurer that was inducted on the same day as Palantir, has already seen its stock drop 22.9% below its induction price. The one exception I found over the last few years was the financial company Arch Capital Group, which was inducted on Nov. 1, 2022, and has never dropped below its induction price since.

As you've probably noticed, these drops don't seem to follow a pattern. These companies represent a wide range of industries. As you can see in the chart, they were inducted at various times throughout the calendar year, and their biggest dip below their induction price sometimes occurred almost immediately, other times several months later. Even their valuations (price-to-earnings and price-to-sales ratios) were all over the place! There seemed to be no way to determine which ones would underperform, only that most of them would.

In fact, as the last two columns of the table show, only six of the 14 stocks were outperforming the S&P 500 after a year in the index: Fair Isaac, GE Healthcare, and Hubbell (the three that only experienced single-digit drops from their induction price) plus Palo Alto, capital manager Blackstone, and Taser maker Axon Enterprise, each of which was able to climb out of its double-digit hole.

That means buying shares of an S&P 500 index fund is usually a better bet than buying stock in new inductees. But what does this say about Palantir specifically?

Pride before a fall

Stocks that experienced a slow but steady rise in share price immediately after their S&P 500 induction -- like Fair Isaac and GE HealthCare -- were less likely to suffer the kind of big drop that knocked their shares below their induction price, but the sample size is small. On the other hand, companies that saw big, uneven jumps -- like Lululemon Athletica or Palo Alto -- were more likely to see big drops as well... and that's the kind of growth we've seen from Palantir since its induction.

Given Palantir's sky-high current valuation and lumpy growth trajectory, I wouldn't be surprised to see the share price drop sometime in the next year, presenting a better buying opportunity for hesitant investors. That said, I do think the company is likely to succeed long-term. However, there are more attractive buys in the market right now that don't have history working against them.

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John Bromels has positions in Lululemon Athletica. The Motley Fool has positions in and recommends Axon Enterprise, Blackstone, GE HealthCare Technologies, Lululemon Athletica, and Palantir Technologies. The Motley Fool recommends Fair Isaac, First Solar, Insulet, and Palo Alto Networks. The Motley Fool has a disclosure policy.