Reminder for tonight's big event; How Long Can the 'Magnificent Seven' Stocks Hold the Line?; Potential setup for an 'almighty rotation trade'
1) If you haven't reserved your spot for tonight's big event, don't delay...
At 8 p.m. Eastern time, my friend and colleague Joel Litman – the founder and chief investment strategist at our corporate affiliate Altimetry – is going on camera with a big prediction for 2024. As he puts it, "It's hard to imagine anything could be more important for your money next year."
Keep in mind that Joel called the Great Recession in 2008 and the COVID crash in 2020 – so when he comes out with a major prediction, it's worth listening to what he has to say.
This event is completely free to attend, but make sure you reserve a spot if you haven't already. You can do so right here.
2) When big-cap tech stocks bottomed 13 months ago, I pounded the table on buying them – especially Meta Platforms (META). Here's what I wrote on November 8 last year:
Over the past week, I analyzed Meta Platforms and concluded in yesterday's e-mail why I think the stock "is a pound-the-table buy right now."
But it's not the only tech giant whose stock has taken a beating...
As you can see in this table, the stocks of seven tech giants have, on average, been cut in half and collectively lost nearly $5 trillion in market capitalization from their peaks, as this table shows (prices as of Friday's close):
These are seven of the greatest businesses of all time, which you can now buy for far less than investors were enthusiastically paying roughly a year ago. As a group, I think they will far outperform the S&P 500 Index going forward.
Since then, every one of these stocks has soared – led by Meta, which is up more than 250% from $90.79 per share to yesterday's close of $318.29 per share.
But now, after such massive outperformance, I think the market leaders going forward are more likely to be smaller-cap and value-oriented stocks.
To be clear, I'm not recommending dumping any of these stocks – especially if you have a long-term horizon and big unrealized capital gains – but I certainly wouldn't be adding any new capital to them...
This "Heard on the Street" column in today's Wall Street Journal captures my thinking: How Long Can the 'Magnificent Seven' Stocks Hold the Line? Excerpt:
As in the eponymous 1960s Western, the so-called Magnificent Seven stocks keep on winning. This also means investors are betting the farm on just a handful of bullets hitting their targets.
The S&P 500 is in a bull market, fueled by soft inflation data in the U.S. and Europe and the widespread belief that interest rates will start coming down early next year. Yet the stock market has become so top-heavy that speaking of a "bull market" carries less meaning than before.
Without Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla, and Meta Platforms – the high-growth, technology-related companies that analysts have dubbed the Magnificent Seven – the S&P 500 would be up only 8% this year, rather than 19%. Indeed, these stocks inched higher Tuesday even as the broader equity market faltered.
That poses a conundrum for investors, who increasingly use index funds. Right now, buying an S&P 500 tracker means investing 30% of the money in just seven stocks. Historically, the top seven have accounted for 21% of the benchmark, taking the end-of-year average of the past decade.
As the column continues, that means a valuation issue...
This not only runs counter to the principle of diversification, but also means the most important stocks investors own are pricey. The seven stocks have posted strong profits lately, but they are still trading at an average of 32 times forward earnings, compared with 19 times for the broader index. This is similar to valuations in 2019, when inflation-adjusted yields in the U.S. were below 1%. They are currently above 2%.
Also, a yawning gap has opened up with medium-cap and small-cap stocks, which are trading at dirt-cheap price-to-earnings ratios of 14 and 13, respectively. Recent data point to a soft landing for the economy, which would normally be a buy signal for smaller stocks, as well as European ones.
3) Coincidentally, just yesterday one of my analyst colleagues here at Stansberry Research sent me a private e-mail about this. With his permission, here's an excerpt:
I rarely pipe up on market direction, but sometimes things really stand out. Now is one of those times.
The promise of tech is growth. They are one and the same. And, historically, tech stocks have been a pretty great place to hide when the economy was slowing down because they could put up numbers that other companies couldn't. As a result, they got a double benefit – falling rates (because the economy was slowing) and relatively accelerating earnings.
That basically explains what's happened over the last year, which is why the Magnificent Seven has been all of the action.
But look at what the market is playing for and paying for... Now, when you ask investors for their best idea, it's a trillion-dollar company growing low teens with no earnings revisions and a huge price-to-earnings (P/E) multiple, with a stock that's up 50% year to date. And now their earnings growth is massively decelerating as they start to lap extremely high year-over-year earnings growth comparisons.
I think this phenomenon is getting very long in the tooth...
Here's data on the Magnificent Seven with the following information: market cap, year-to-date performance – which is a function of how much earnings per share ("EPS") and the multiple have grown – how much EPS is expected to grow next year, the future price-to-earnings (P/E) ratio, and year-over-year EPS growth for the past two, current, and next two quarters:
What stands out is that we are in or just reported the peak quarter of EPS growth for six of the seven companies – Tesla (TSLA) is in freefall – which I have labeled in bold in the last table.
Traditionally, as a growth investor (and this is even more of an ironclad rule in cyclical growth like semiconductors), you buy the trough of EPS growth and sell the peak. That's it. And in fact, that basically worked for these and most other tech names, which troughed about a year ago and been on this furious rally since.
Which means it looks like it's time to sell.
Of course, my analyst also considered how he could be wrong...
Well, simply, if these companies absolutely smash numbers, then EPS growth could continue.
But that's not happening... Only Nvidia (NVDA) and Meta have shown a material upward EPS revision this year. Note that Amazon (AMZN) also did, but that was only due to the low starting point – its EPS estimates are still well below where they started 18 months ago.
Apple (AAPL), Microsoft (MSFT), and Google (GOOGL) – the three biggest – aren't showing any EPS revisions at all. That's pretty shocking, especially Microsoft, which is supposed to be the big winner from AI.
I know it's a market of stocks, not a stock market, and so there are unique drivers to each one.
Also, December is not when things get sold. We have some time. We're entering the silly season when hedge funds are chasing performance. You can see it in this final rally in crypto...
But the market is always chasing the best relative growth/momentum – and for the Magnificent Seven, that is peaking right now – so I think we will do ourselves a favor by looking elsewhere for growth and getting ready for a mega-rotation.
Because this isn't all negative – it's hugely positive, if I'm reading things right. Inflation is slowing, the economy is slowing, and interest-rate hikes are likely over. That's when you want to buy value/cyclical/small-cap names, historically (as old investors say about cyclicals, "You buy 'em when they look expensive and sell 'em when they look cheap").
I think we are set up for an almighty rotation trade – and it doesn't take a whole lot of selling of trillion-dollar companies to create enough cash to really push around the other 493 names.
My analyst then continued his e-mail by naming some of his favorite potential stocks to profit from this rotation trade – some of which we'll share with our Stansberry's Investment Advisory subscribers if the setups look promising enough.
If you aren't already a subscriber, find out how to become one – and gain instant access to the latest issue, which we just released on Friday with a brand-new stock recommendation – for just $49 for the first year by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.