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Big Tech Weighs Too Much On The S&p 500. Feast On These Stocks Instead.

Nigeria Student Forum / General Discussion / Big Tech Weighs Too Much On The S&p 500. Feast On These Stocks Instead.

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Sani Ibrahim
Abubakar Tafawa Balewa,University
Agricultural economics and extension
100Level, Nigeria.
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FAANGs? No thanks.
FAANGs? No thangs—I don’t care for the acronym. Too
menacing, plus the G should really be an A for Alphabet . My
colleague Al Root argues that Microsoft and Tesla deserve to
be counted among this pack of world-beating stocks.
I recently factored that into a deep-dive analysis using
Scrabble tiles , and came up with A FAT MAN. Maybe it’s not
perfect, but what it lacks in gender neutrality and body
positivity, it makes up for with metaphorical resonance. This
pandemic, I can verify , has been making A FAT MAN even
fatter.
Apple (ticker: AAPL) is up 50% this year; Facebook (FB), is up
24%; Amazon.com (AMZN), 63%; Tesla (TSLA), 406%;
Microsoft (MSFT), 29%; Alphabet (GOOGL), 11%; Netflix
(NFLX), 45%. This has been a blessing for S&P 500 investors,
who have exposure to all but the T, in proportion to each
company’s considerable stock market value. The index has
returned 5% this year, including dividends, even though the
latest consensus guess on its underlying earnings has them
falling 19% from last year’s level.
That raises the question of whether the index has been thrown
out of whack, and whether it will ever be thrown back into
whack, a process more commonly called reversion to the
mean . The top five S&P 500 companies recently made up 23%
of the index’s value. They’re impressive companies, all right,
but the average weighting for the top five over the past
decades is a mere 14%.
Or look at valuations. Putting aside this year’s earnings
decline, the S&P 500 trades at 21 times last year’s record
earnings. The historical average is closer to 15 times. There
are ways to gently trim A FAT MAN’s portfolio weighting
without feeling deprived of stocks.
Like adding small-caps. Wait! Don’t go. Let me explain. There
used to be something called the small-company effect,
whereby up-and-coming businesses, on average, tended to
enjoy better long-term stock performance than well-
established giants.
Lately, of course, the small-company effect has been thrown
into reverse. The S&P 500 has returned 90% over the past five
years, versus 40% for a sibling called the S&P SmallCap 600.
That has skewed pricing. Small companies are now nearly 30%
cheaper than large ones, relative to last year’s earnings.
There’s no need to load up on small-caps, but investors who
want to add a smidgen can do so with index funds that hold
them exclusively, like Fidelity Small Cap Index (FSSNX), or
ones that hold companies of all sizes, like Vanguard Total
Stock Market Index (VTSMX).
On the subject of unexciting things that might be good for you,
consider non-U.S. stocks. As a young man, I was a world
traveler, but since having kids, I have just enough wanderlust
for the trip from Mexico to Canada at Epcot’s Food and Wine
Festival . Likewise, it’s difficult to get excited about a five-year
average return of 2% for MSCI’s all-world, ex-U.S. index when
its U.S.-only one has returned 11%. But Schwab investment
strategist Jeffrey Kleintop points out that, although the U.S.
index has continued outperforming since the end of April, the
ex-U.S. one has done better if the companies in both indexes
are given equal weightings. In other words, without that
handful of tech behemoths dominating the U.S. market,
overseas stocks have compared well. Index funds like Schwab
International Index (SWISX) can add easy exposure.
Looking for something with more pizazz? Goldman Sachs
recently identified what it calls the Future Five: companies
with large addressable markets, high barriers to entry, and
rapid sales growth, which its analysts think might gradually
creep up in the size ranking for S&P 500 companies. They are:
Intuitive Surgical (ISRG), a maker of medical robots; Autodesk
(ADSK), which sells design software for things like
construction and manufacturing; ServiceNow (NOW), whose
software handles workplace activities like internal audits,
recruiting, and contract management; PayPal Holdings (PYPL),
the digital payment company; and Vertex Pharmaceuticals
(VRTX), which has treatments for muscular dystrophy and is
pushing into blood disorders.
The SAVIPs? Surely not. My Scrabble analysis hasn’t turned up
anything workable for these five. For now, just call them the
InAutoServicePayVerts.
I spoke this past week with Stephen Schwarzman, co-founder
of the Blackstone Group (BX), a massive player in private
equity, real estate, and hedge funds .
Blackstone stands to reach new types of investors, because
the Labor Department recently said 401(k) providers may add
certain types of funds that dabble in private equity.
If you’re not familiar with private equity, picture the stock
market, and then take away the market part. What’s left would
be ownership stakes in companies, without the ease of buying
and selling them as fast as a Robinhood trader can say, “Pass
me another hard seltzer , bro.” Private-equity funds typically
have long lockup periods, and their managers can use
leverage, and meddle in the companies they invest in, or buy
entire companies.
Blackstone ended its most recent quarter with an industry-
record $156 billion in dry powder. Schwarzman says it has
recently focused its spending on life sciences and technology.
Purchases include Bumble, a dating app; Ancestry.com, for
genealogy, and Oatly, a supplier of oat milk. He says
Blackstone now owns a billion square feet of warehouses,
making it the firm’s largest real estate category, and providing
favorable e-commerce exposure. It has also bought houses
and apartments in the suburbs.
I asked if cities will come back. “To the extent that
governments fall short, the recovery will be much longer, and
to the extent that governments are excellent, I don’t think it
will be a long-term issue,” Schwarzman says. Among cities he
mentioned favorably were Miami, Austin, and Dallas.

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