Key insights
- An analysis of historical stock drawdowns suggests that NuScale Power, despite an 82% decline, has a chance of recovery. A Morgan Stanley study indicates that nearly half of stocks experiencing similar drops recovered to previous peaks, with some, like Nvidia, significantly outperforming. However, the analysis excludes delisted companies, and recovery is not guaranteed.
NuScale Power (SMR 0.24%) stock exploded last year as investors looked to capitalize on the enormous energy demands of artificial intelligence (AI). In the years to come, the power-hungry technology will increasingly strain an already taxed grid, creating an urgent need that NuScale and other small modular reactor stocks could help fill.
But, as so often is the case, what went up came down -- hard. After peaking at $57.42 in October of last year, shares plunged as much as 82%. The stock now trades around $12, and are currently 76% from its all-time high.
That's quite a fall.
But before you write NuScale off as a lost cause, consider what history shows happens to stocks in the same boat.
A recent study by Morgan Stanley's Counterpoint Global examined the performance of thousands of stocks that experienced significant declines over the last 40 years -- more than 6,500 from 1985 to 2024. It's likely the most thorough analysis of stocks in the same position as NuScale you're liable to find.
For stocks that found themselves in the same position -- an 80% to 85% drawdown -- 49% recovered to "par" -- the previous peak the study measured from -- or surpassed it, taking an average of 4.2 years to do so.
Take a look at the table below, showing the relationship between the magnitude of the drawdown and stock performance in the years that follow. You can clearly see that the further a stock falls, the less likely it is to get back to par, especially once you reach 95% and above.
Consider a generic stock that peaks at $100 and falls 80%, trading at $20. A recovery to $100 would mean a 400% gain from the low. That is exactly what nearly half of the stocks studied did. And many went on to do much better.
Take Nvidia: the AI behemoth saw shares fall 82% in 2002 and went on to become one of the best-performing S&P 500 stocks of all time.
Now, there are some important -- and pretty massive -- caveats here. First, the data set excludes companies that were delisted due to bankruptcy or similar reasons. If NuScale were to run out of funds -- a real possibility given the industry -- these lessons would not apply.
Second, and closely related to the first, there is no way to know if NuScale stock's bottom is 82%. It could fall further from here and end up in the more than 95% drawdown bucket, where only 16% of stocks scrape back to par -- a very different picture.
And finally, to attain these returns, you have to buy at the precise bottom, something that is impossible to do. No one can time the market reliably.
So, obviously, you shouldn't take this data as any sort of guarantee of recovery or a prediction of 400% returns. But what I hope it shows you is that a major drawdown is not a death sentence for a stock, by any means.
NuScale is developing an exciting technology with the potential to be transformative. But it is a long road to get there. Even though Small Modular Reactors (SMRs) are much faster to deploy than traditional nuclear reactors, the process is still roughly seven years, which creates serious execution risk.
Still, the payoff could be substantial, and I think NuScale is worth owning for investors with an appetite for risk and a long investment horizon.