Perspective on the Mega Cap Tech Stocks
This new note on large cap tech, from Novel Investor (1) caught our attention, not the first on the topic.
The S&P 500 is at all-time highs, up 9.2% year to date. That’s total return, by the way. If that seems surprising in any way, you’re not alone. On the surface, one might conclude that we’re in a raging bull market. The enthusiasm, the speculation, the day trading…all the ingredients are there. A more nuanced answer is that there’s a bull market in a handful of names hiding a bear market in many more. The largest companies in the S&P are performing exceptionally better than the rest. So much so, that it’s having an outsized impact on the index. The numbers are mind boggling really.
“…human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. ”
Apple went from 23x earnings to start the year to 38x today for a $834 billion increase in market cap this year. Amazon went from 80x earnings to start the year to 131x today for a $787 billion increase in market cap this year. Alphabet went from 28x earnings to start the year to 36x today for a $178 billion increase in market cap this year. Microsoft went from 29x earnings to start the year to 39x today for a $512 billion increase in market cap this year. Facebook went from 32x earnings to start the year to 36x today for a $250 billion increase in market cap this year.
In total, that’s a $2.5 trillion gain in market cap year to date! For five companies. (That it occurred with little change in fundamentals should be noted.) To put one of those numbers into context, Apple gained a Facebook this year. Apple’s market cap increase equals the entire market cap of the fifth-largest company. Amazon is a rounding error away from doing the same. Of course, that performance has only made them more popular. Companies once deemed uniquely “safe” from today’s problems, now seem to be “safe” at any price. And therein lies the dilemma.
Popularity can be infectious. Especially when it involves making money. Which can drive prices to extremes. And history has shown that paying a high price for popular stocks rarely produces the returns we expect. Maybe these five companies are the exception to the rule. That’s the running narrative anyways. At the very least, it’s a reason to be cautious. The biggest risk for investors is getting caught up in the excitement.
We recall, as if it were yesterday, the earlier, less mature version of today’s market (from about 1995 around the time of the Netscape IPO [2], to the Spring of 2000). The market then was clearly pointing to something historically profound, but ended up grossly mis-pricing many of the underlying assets at the end of the cycle.
Sources:
[1] https://novelinvestor.com/the-popularity-contest-in-mega-caps/
[2] https://www.marketwatch.com/story/netscape-ipo-ignited-the-boom-taught-some-hard-lessons-20058518550
[3] https://www.forbes.com/quotes/5352/