You know the names of these popular growth stocks. But you might not know just how important they’ve been to this post-crash rally.
Stocks just produced one of their strongest quarters in living memory, with the S&P 500 returning 20.5% in the period ending June 30. The index has nearly fully regained its previously-lost value, declining only 6% for the first half of the year. Investors frequently ask how the S&P 500 can be down only modestly given the Depression-like broad economic statistics.
The answer is the buoyant effect of mega-cap stocks like Amazon (AMZN, +49% year-to-date), Microsoft (MSFT, +29%) and Apple (AAPL, +24%), all of which benefit from the pandemic environment. Facebook (FB) and Alphabet/Google (GOOG), also beneficiaries, have produced gains this year, as well. These five companies hold the top five largest market capitalizations in the S&P, comprising a combined 22% weighting, so their effect is huge. For comparison, if all of that index’s stocks had the same weighting, the S&P 500 would have been down 10.8% in the first half.
Likewise, growth stocks, which include the tech giants, have gained 9.8% through June 30, far ahead of the dismal 16.3% loss for value stocks. Similarly, small-cap stocks have produced a 13.0% loss. The international picture is little different: developed country stocks have fallen 12.6%, while emerging market stocks have declined 10.7%, helped by modest gains in Chinese stocks.
The “beneficiaries” have continued to surge, with Amazon stock up another 13% and Alphabet/Google gaining 10% since June 30. Also, the roster is expanding, with riskier but at-least-momentarily well-positioned companies like payments processor Square (SQ) surging 21% since the start of July. In the first five trading days of July, the S&P 500 has already beaten the equal-weighted S&P 500 Index by more than one percentage point.
Can You Still Invest in Mega-Cap Stocks?
What does an investor do in this two-tier market? First, simply being aware of this distortion is valuable. When thinking about a stock, asking “which bucket does it fall into… the beneficiary bucket or the all-others bucket” can be illuminating. Riding a beneficiary, like one of the five mega-cap stocks listed above, can work exceptionally well. Avoiding stocks in the all-others bucket can, too.
However, trends don’t continue forever, and the momentum will change, perhaps abruptly. So, check to see how much you have in each bucket – are you too concentrated in one (either one) and too light in the other? Think today about what would push you to shift your positions, when “enough is enough.”
Also, there are many other forms of diversification to keep in mind, including sectors, size, quality and stocks vs. bonds vs. other vs. cash. And, remember, no one gets any of this exactly right. Close enough is broadly defined and is usually, well, close enough.
As new chief analyst of our Cabot Undervalued Stocks Advisor newsletter, I will try to unearth stocks that feature elements of both value and growth. Turnaround stocks are my specialty—companies that, for one reason or another, have been neglected or tossed aside by the market, but are growing at a healthy rate. Because they’re so popular, mega-cap stocks typically don’t fit into that category, though we do have one of the names listed above in our portfolio.
To learn what else I’m currently recommending in this bifurcated market environment, click here.
Editor’s Note: This post was excerpted from the most recent issue of Cabot Undervalued Stocks Advisor.