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Beyond the Magnificent Seven: Alternative mega-cap investment strategies

Published 31/05/2024, 12:38 am
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
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Over the past decade, today’s mega-capitalization stocks have markedly outperformed the S&P 500, driven by their rapid revenue and earnings growth. However, whether these companies will maintain their colossal capitalizations remains uncertain.

For instance, if investors sense that the high growth expectations for AI spending need to be revised downward, the market could react swiftly and negatively.

Against this backdrop, strategists at Yardeni Research outlined in a new note two alternative mega-cap investment strategies for investors seeking new opportunities beyond the dominant tech giants

One of these strategies, dubbed ‘MegaCap-7 Pure Value,’ focuses on the benefits of looking at mega-cap stocks from a value perspective. Specifically, by examining companies within the S&P 500 Pure Value index, the Yardeni team has identified several potential candidates that can serve as a counterbalance to the high-growth tech sector.

This group includes Berkshire Hathaway (NYSE:BRKa), Bank of America, Chevron (NYSE:CVX), Wells Fargo, Verizon Communications (NYSE:VZ), Goldman Sachs, and AT&T (NYSE:T). With a total market capitalization of $2.1 trillion, this selection of stocks is significantly smaller than its growth counterpart but offers stability and value.

"Most of these seven companies have a long way to go before reaching the trillion-dollar club," the report notes, implying their potential for growth.

Similarly, Yardeni has also created the MegaCap-7 Pure Growth group by selecting the top seven market-cap companies from the S&P 500 Pure Growth index. Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), and Eli Lilly (NYSE:LLY) comprise this group, with an aggregate capitalization of $14.4 trillion.

Six of these companies are already in the trillion-dollar club, the firm highlighted.

Remarkably, both groups have outperformed their broader S&P 500 style indexes year-to-date. The MegaCap-7 Pure Growth leads with a 25.0% gain, more than double the 12.1% rise of the S&P 500 Pure Growth index. The MegaCap-7 Pure Value group, with an 11.0% gain, also outpaces the S&P 500 Pure Value index's 2.0% rise.

According to the report, valuation metrics further support the case for diversification. The MegaCap-7 Pure Growth companies have an aggregate forward P/E of 24.4, higher than the S&P 500 Pure Growth index at 21.5. In contrast, the MegaCap-7 Pure Value group has a forward P/E of 11.9, compared to 9.9 for the S&P 500 Pure Value index.

"On a relative P/E basis, viewed over time, we see no cause for alarm," the strategists wrote.

Meanwhile, both groups continue to exhibit strong profitability, with the MegaCap-7 Pure Growth's forward profit margin at a record-high 24.6%, significantly higher than the S&P 500 Pure Growth index's 14.5%.

The MegaCap-7 Pure Value’s forward margin is sitting at 12.6%, nearly triple the S&P 500 Pure Value index's 4.7%.

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