There’s a $9 trillion elephant lurking over Wall Street’s shoulder and its name is Big Tech. Apple, Microsoft, Alphabet, Amazon and Facebook now account for 22% of the S&P 500, double where we normally expect the top stocks in the market to weigh in.
When the Silicon Giants all move up together, investors don’t have much of a problem. That’s how these stocks achieved their massive market footprint in the first place.
But when they all hit a wall, there’s not a lot of room left to hide. And that’s why the last few weeks have felt so apocalyptic.
All five giants are down for the month, with Apple and Facebook becoming an especially heavy weight on the market as a whole. If earnings season goes as badly as it did a few years ago, their combined weight could rip Wall Street apart.
After all, as far as a lot of people are concerned, each of the giants is more or less interchangeable. They’re all involved in some combination of cloud computing, streaming video, electronic payment and online advertising . . . and superficially, the stocks all look alike.
They all have a reputation for robust earnings growth, especially in the pandemic (computers don’t get sick) and carry premium valuations as a result. Now that the pandemic is receding and interest rates are becoming less cozy, Wall Street’s appetite for that narrative is reaching a limit.
Has the entire market become a prisoner of Silicon Valley’s success?
The Bigger They Get, The Harder They Fall
Think about previous market heavyweights: General Electric, General Motors, ExxonMobil, Eastman Kodak, IBM, DuPont and on and on.
All rose to dominate whole sectors of the economy and then stalled, one way or another. Investors bailed out and parked their money elsewhere.
But there was always somewhere to go, a new giant-in-waiting ready to step up and become the new leader. In the Big Tech era, you could migrate to Tesla, which is roughly the same overall proposition and will probably stumble if its peers stall, or Berkshire Hathaway, which owns substantial amounts of Apple and Amazon.
To get real diversification away from the high-tech heavyweights, you need to drop down to the big banks and big consumer stocks like JPMorgan Chase, Walmart and Johnson & Johnson. They’re relatively defensive, but even the biggest is barely 1/5 the size of Apple today.
I like the banks here. I think they’ve been neglected in the Fed’s zero-rate world and will pay reasonable dividends in the meantime. Likewise, there’s a lot to be said for “boring” old Johnson & Johnson, which pays double the yield of Apple and Microsoft put together.
But Walmart is a trickier story. Theoretically, it’s still vulnerable to the same sorts of disruptive competitive strategies that built it in the first place . . . as Amazon grows, brick-and-mortar retail fades.
Walmart becomes interesting only in the unlikely scenario that Amazon evaporates or Walmart copies enough of Amazon’s operations to compete head to head, effectively becoming a technology company in its own right.
And since we’re talking about areas of the market that aren’t tightly correlated to Big Tech performance, that latter scenario isn’t exactly helpful after all, is it?
Past Glory, Cloudy Futures
I doubt that Amazon is going to evaporate. Unlike General Electric, the balance sheet is rich with cash and management can engineer sustainable profitability at any time, simply by pausing investments in future growth.
Until that moment, the company isn’t even mature, let alone moribund. And to some extent, all the big tech stocks tell a similar story.
Facebook is the weakest link because it’s still entirely tied to its websites. As we learned this week, when the sites go down, Mark Zuckerberg’s stock suffers.
But I don’t see any of the giants collapsing any time soon. This isn’t the dot-com ’90s. These are corporate empires with their own intrinsic gravity, massive established markets and management teams eager to acquire any upstart that poses a significant competitive challenge.
On the other hand, it’s probably time for the other 99% of the companies in the S&P 500 to reassert a little collective relevance. They’ve let Silicon Valley drive the economy a long time.
Five years ago, Apple wasn’t even 3% of the S&P 500. Microsoft was barely 1/3 of its current weight in the index. Amazon, Alphabet, Facebook were practically afterthoughts.
Back then, these stocks had roughly the same footprint as Johnson & Johnson, AT&T and Verizon. Those companies didn’t collapse. They simply didn’t capture investor excitement . . . and so didn’t really go anywhere.
We’ll be talking more about the opportunity here in coming weeks. Essentially, I think it’s unlikely that Big Tech will cave in. But the real fire will be elsewhere.
Finding the giants of tomorrow is what real long-term investors do. Want more details? Just talk to firstname.lastname@example.org.
Cannabis Corner: Trust Your Eyes On Growth
Aurora Growth Corp. (ACB) remains our focus here as we move through an up-and-down news cycle. This week, the stock is up again but most of the rest of the cannabis names I track are down.
I think ACB’s rebound is more about relief than a real rally. I would not overweight this stock. And if it was the only stock in the group, I wouldn’t pay any attention to the theme.
Remember, the whole thrill of cannabis investing is growth. You were given the chance to get in on the ground floor and watch an entire industry emerge from the regulatory shadows to a legitimate enterprise.
That narrative was all about watching the numbers shift from near zero to billions. We wanted sales to climb at an exponential rate, at least until our stocks reached a scale where that revenue translated into sustainable profit.
We still aren’t getting that with ACB. Buried in the reaction to the company’s downsizing plan was the stark fact that revenue dropped 20% last quarter from year-ago levels.
Any retreat on the top line is a warning sign. But when you’re only making $50-$60 million a quarter, that $10 million decline can be fatal to arguments that you deserve a $2 billion market cap.
Management says the company will be profitable soon. That’s great, but I don’t see revenue gains for at least six months . . . and that’s a long time to wait in a world full of more dynamic opportunities.
Rival Canopy Growth (GCG) keeps pushing sales in the right direction. So do niche names like retailer Charlottes Web (CWBHF).
CWBHF is already booking almost 1/2 the revenue as ACB and is still only 1/4 the size in terms of market cap. Which stock would you rather own? The one that is growing and has room to grow. . . or the one that isn’t?
GreenTech Opportunities: Oil Prices Remain Our Friend
I’ve been passionate about the intersection between technology and the environment for a long time. That’s why I named my company “GreenTech.”
And now I’m bringing that passion to this newsletter. Every week, we’ll be looking at the new ways to evaluate potential investments according to their environmental, social and governance profiles.
For some, that means simply screening out “bad” actors, but that’s always going to be a subjective process. Are mining companies always bad? Is General Motors worse than Tesla?
In a world of complex supply relationships, Apple may not be as green as its fans like to believe.
But we can always rely on one simple principle. When “dirty” energy gets scarce, “clean” alternatives become a lot more attractive to consumers who need to keep the lights on, one way or another.
And that, in turn, can build big businesses. Gas prices are back in sight of $4 a gallon in many parts of the country now. Big Oil is cheering. The relief is palpable.
As people start commuting back to work, demand for fuel rises and prices likely rise along with it.
I just read a note from JPMorgan that contemplates $150 oil in the foreseeable future. That’s close to double where it is today.
They’re actually looking forward to it. So are companies like Exxon and their long-suffering shareholders.
But for us, $4 gas makes a Tesla or hybrid car a whole lot more attractive than it was two years ago. Bigger utility bills get us looking more closely at solar panels and alternative heating systems.
There’s money to be saved in switching . . . or will be soon. And that’s the opportunity I want to capture here, week after week.