Trillion-dollar giants like Apple, Amazon and Microsoft are still good companies as the early post-pandemic recovery recedes in the rear view . . . but with so much of the Fed’s money sloshing around Wall Street, are they good enough to keep the entire market afloat?
After all, a lot of people are grumbling that across the S&P 500, stocks have gotten too far ahead of their current cash flow to be worth buying. But, remarkably, the Silicon Valley juggernauts aren’t doing a whole lot better than the market as a whole.
Yes, they have a reputation for robust growth to justify spectacular historical performance and high expectations today. Unfortunately, the math gets murky once you look beyond the hype.
Start with Apple, the $2.6 trillion linchpin of the market, weighing in at 1/16 of the entire capitalization of Wall Street right now. It’s growing nicely enough as Tim Cook juggles the share count and revenue mix.
And yet all that accounting wizardry only added up to a 10% earnings boost last year, which is a real comedown from the glory days when mighty Apple could cruise ahead at triple that speed.
Next year looks even cloudier as inflation and supply chain glitches come home to roost. No matter what Tim Cook has up his sleeve, growth could slow to a crawl.
That’s a problem for a company that currently commands a premium price for its theoretical dynamism. If it can’t back up its hype, shareholders have a problem.
Now extend that logic to Microsoft . . . and Alphabet . . . and Amazon . . . and Facebook . . . and Tesla. Have the six stocks that drove the boom become a noose around Wall Street’s neck?
Growth At The Right Price
If you’ve watched me for any length of time, you know about the way a fast company can be attractive even at a high price. It’s all a matter of whether it’s fast enough to grow into its current valuation before our patience hits a wall.
In GameChangers, for example, we accept slightly higher multiples because our companies are expanding at a relatively high rate. For Value Authority, growth is nice, but not essential. My primary concern there is getting consistency and current income for a discount price.
Someone investing in the S&P 500 today wouldn’t really get a good deal on either front. As you’ve heard, the Fed’s easy money has swelled the overall market’s valuation to a lofty 21X future earnings . . . and while the pandemic rebound has justified that multiple in the past, the hyperbolic expansion curve is flattening out fast.
We might only get 10% earnings growth next year once the easy comparisons stop. That’s good, but not really a compelling proposition at this price.
While there are always exceptions, if you aren’t getting faster growth than the market as a whole or a cheaper price, a stock probably isn’t worth your attention.
Mighty Apple would surprise me if it boosts earnings per share more than 9% in the coming 12 months. And yet here around $150 you can’t get in below a 26X multiple.
That’s just not attractive. If someone offered you these shares without telling you the name of the company, would you buy in?
Microsoft is a similar story. Despite its reputation for world domination, its growth looks likely to slow to around 9% in the coming year . . . slower than the S&P 500 as a whole.
Suddenly this company looks less like a leader and more like a laggard, a drag. And yet people have talked themselves into paying 34X future earnings for the prestige of owning a giant.
Alphabet . . . 7% growth in the coming year. Facebook is only a little better at 9% or so.
Amazon’s earnings are actually on track to go down. Yes, there’s a long-term strategic framework in place, but is there any urgency in buying into a company that’s currently in decline?
Tesla has real growth on their side, admittedly. Elon Musk’s brainchild is on track to boost earnings 63% in the coming year . . . but the stock costs 117X what the company will earn in the next 12 months.
Exponential expansion is great. If you think Tesla can grow at that rate forever, profit will stack up to shrink the multiple to a “lowly” 27X sometime in 2025 or 2026, assuming that the stock doesn’t rally one cent in the meantime.
I don’t think Tesla fans relish the prospect of holding on for 3-4 years with zero gratification. But that’s just what the math tells me.
And if you’re nervous about the S&P 500 here at 21X, why accept the prospect of hanging on for years in order to see your stock grow into an even loftier 27X multiple? Growth is great. Growth at any price is dangerous.
After all, all growth projections are hypothetical. Tesla might surprise to the upside. It might also stumble. Until we see the quarterly reports, it’s all subject to revision and possibly a bumpy ride.
Better Prospects Below The Surface
My screens show dozens of stocks that are actually growing fast enough to justify their multiples. The big banks are an obvious contender as the Fed edges toward reversing its current accommodative policy.
Higher rates mean better profit margins for Bank of America, Citigroup, Goldman Sachs and American Express. They’re hurting now, but we don’t buy the past. We buy the future.
In technology, Qualcomm and Micron Tech are a much better deal than any of the giants. Qualcomm has its problems, but it’s still a cash machine. I’m looking for double Apple’s growth rate here in the coming year . . . at half the price.
Micron might double its profit in the coming year. That’s faster than Tesla, for a lowly 7X multiple.
And these are only a few of the companies on my screen that don’t make it to my subscriber portfolios. I’m choosy. We have the entire market to play with.
That’s why I’m not worried about a correction. A big dip is an opportunity as fast money flees good stocks, opening new entries.
If those entries don’t appear, we’ll simply have to buy the best stocks we can find. There’s no crying on Wall Street.