Anyone recall the logic in the 1960s and 1970s that suggested there were
only 50 stocks one needed to look at, and those 50 stocks could never go
wrong?
That theory was labeled the "Nifty-Fifty".
Nonetheless, the long bear market of the 1970s that lasted until 1982 caused
valuations of the nifty fifty to fall to low levels along with the rest of
the market, with most of the Nifty-Fifty under-performing the broader
market averages.
The "Nifty-Fifty" of the 1960s gave way to the "Four
Horseman" of the tech era: Microsoft, Dell, Cisco and Intel.
Microsoft
Microsoft opened the year 2000 at $41.19.
It is now $53.85.
Congratulations, you are ahead. Counting dividends, well ahead.
Dell
Dell is now private. Historically Dell last traded at $13.73 on 10/29/2013. It
opened the year 2000 at $50.40. You are seriously underwater.
Intel
Intel opened the year 2000 at $29.65. It is now $33.16.
Congratulations, you are ahead.
Does it feel like it?
Cicso
Cisco opened the year 2000 at $47.43. It is now $27.12.
You are seriously underwater still.
If you bought the hype-of-the-day "Four Horseman" in 2000 and held
on, you are still underwater fifteen years later.
Recall that EMC, Oracle, Sun Microsystems, and Juniper Networks were all
regarded as must own for the long haul "gorillas".
New Four Horseman
On January 6 2012, GeekWire proclaimed Meet the new ‘four horsemen’ of tech: Sorry, Microsoft, Dell,
Cisco and Intel.
Oh, how the technology landscape has changed. Ten
years ago, the industry was dominated by names such as Microsoft, Intel, Dell
and Cisco.
Fast forward to 2012, and the makeup looks quite different. CNN recently surveyed 30 technology experts and thousands of readers
to come up with what it dubbed the Four Horsemen of tech.
Respondents were asked to choose only from publicly-traded companies, so
Facebook didn’t make an appearance.
Apple easily was the top vote getter, followed by Google, Amazon.com and — an
oldie, but a goodie — IBM.
IBM, Apple and Amazon certainly could qualify as comeback stories, while
Google has yet to really be tested in terms of its market dominance in
Internet search. (Possibly signaling a fall).
Nonetheless, what’s fascinating is how Microsoft no longer makes the cut. (In
reader polling, IBM edged out Microsoft with 67 percent of the vote).
Microsoft is still a juggernaut, but as CNN’s editors point out “the PC is no
longer driving technology growth.”
Sweet Sixteen
Oracle, Salesforce, Microsoft, and Cisco were in the "elite eight"
with Qualcomm, Verizon, VMware, Samsung, Nuance, eBay, ARM, and Dell rounding
out the "sweet sixteen".
Really? Yes, really.
Giddy Up!
In July of 2015, CNN Money proclaimed Why you need to own the Four Horsemen of Tech.
Move aside IBM, you were replaced by Facebook as a "need to own".
Fab-Five
On November 16, Yahoo Finance reported How A Monster Year For Amazon, Google And Facebook Is
Carrying The Stock Market.
There are 500 companies* in the S&P 500, but 2015 has
been a year for the top 1%. Five companies -- Amazon.com, Alphabet/Google,
Microsoft, Facebook and General Electric -- have collective returns that
account for more than the entire return of the index year-to-date, according
to a note from Goldman Sachs.
Excluding the aforementioned quintet, the S&P 500 would be down 2.2% this
year, instead of being virtually flat, up 0.1%. Goldman's chief U.S. equity
strategist and the firm's portfolio strategy research team note that narrow
market breadth, with just a handful of strong performers carrying the load
for a slew of weaker performers, tends to favor high-quality stocks with strong
balance sheets and lower volatility.
(Netflix also warrants mention, as the S&P 500's top performer for the
year. But even with its stock up 120% in 2015, Netflix is far smaller than
the companies above and its $46 billion market cap dims its influence on the
cap-weighted S&P.)
Notably absent from the list is Apple, which has returned just 3.7% in 2015,
and Wal-Mart, down 33% and suffering through its worst year in stock
performance terms since 1973.
Fab-Five Drive S&P
Warnings Signs
Breadth is a huge warning sign. That fewer and fewer stocks participate in
rallies is synonymous with topping action.
Netflix Key Stats
Check out the Netflix Key Stats.
- Trailing PE: 319
- Forward PE: 462
- Market Cap: $51.53 billion
- Book Value: $5.07 per share
- Share Price: $120
- Price/Book: 23.09
Amazon Key Stats
- Trailing PE: 950.63
- Forward PE: 117.65
- Market Cap: $311.04 billion
- Book Value: $26.50 per share
- Share Price: $663.54
- Price/Book: 24.27
Facebook Key Stats
- Trailing PE: 108.20
- Forward PE: 37.68
- Market Cap: $304.77 billion
- Book Value: $14.72 per share
- Share Price: $107.77
- Price/Book: 7.14
Hey, no problems there!
After all, Facebook and Amazon are "need to own" stocks
according to CNN Money.
Ozone Layer
Momentum players have ignored the warts, thereby pushing the market higher
and higher so that its now well into the ozone
layer.
GMO Forecast
In contrast to mainstream media "must own" analysis, GMO
just came out with its Seven Year Forecast.
GMO's Disclaimer
"The chart represents real return forecasts for
several asset classes and not for any GMO fund or strategy. These forecasts
are forward‐looking
statements based upon the reasonable beliefs of GMO and are not a guarantee
of future performance. Forward‐looking
statements speak only as of the date they are made, and GMO assumes no duty
to and does not undertake to update forward‐looking
statements. Forward‐looking
statements are subject to numerous assumptions, risks, and uncertainties,
which change over time. Actual results may differ materially from those
anticipated in forwardlooking statements. U.S. inflation is assumed to mean
revert to long‐term
inflation of 2.2% over 15 years."
Real Returns
GMO depicts "real" inflation adjusted returns. If one assumes 2%
inflation and the forecast hold true, then seven years from now, the stock
market will be where it is today.
But the stock market will not be flat for seven years. It is far more likely
to look like this.
Greater Fools Game
I actually believe GMO is overly optimistic.
Only those playing the greater
fools game (whether they realize it or not) are investing in stocks at
these prices.
Nifty-Fifty Becomes Fab-Five
A friend of mine pinged me with this comment in regards to the "Fab
Five":
I think this is another one of those instances where the
extreme nature of the topping process (and the market advance has thinned out
to an incredible extent) probably hints at the significance of the top being
formed. The only other time a topping process took this long was during the
last stage of the tech bubble.
If the future rhymes with the handful of previous cycles we have to guide us,
the "real" stock prices we see today may not be seen again for
another 20-30 years.
Valuations Matter
There is never a point in which a handful of stocks or even a basket of 50
stocks are "must own" and you can put them away and forget
about them. Valuations must be taken into consideration along with changing
times and changing technology.
Yet, here we go again, with the same theories telling people they can do
precisely that. Today's version of the "Nifty-Fifty" is now called
the "Fab-Five".
And another set of "Four Horsemen" are galloping again .... for
now.
Mike "Mish" Shedlock
