The Magnificent Seven
Seven stocks are generating most of the returns this year, named the Magnificent Seven. Meta, Apple, Amazon, Alphabet, Microsoft, Nvidia, and Tesla are the seven companies, and they're delivering an Oscar-worthy performance.
These seven stocks are up 90% year-to-date as a group, led by Nvidia, up 191%. The group's laggard is Alphabet because it's "only" up 35%. The drive to artificial intelligence (AI) and the Fed's projected slowdown in raising interest rates is fueling the move in these stocks.
It seems obvious that these stocks are rallying because AI is everywhere, and everyone knows the Federal Reserve will stop raising interest rates eventually. However, these seven stocks were down 45% in 2022, with Meta and Tesla falling 65%. If these companies were poised to soar this year, why did they crash last year?
Ycharts tracks 9,820 US stocks. The Magnificent Seven represents 0.07% of the companies in its database. Is it possible to identify the seven best-performing stocks before they move higher? I doubt it. And if it were, how come no one mentions Propel Media, Sky Petroleum, Freedom Holdings, Arno Therapeutics, Ai Technology Group, Diamond Holdings, or Pineapple Express? These stunning seven stocks are up 41,000% this year!
Owning the best-performing stocks before they move higher is mostly luck. Finding the needle in the haystack consistently is impossible, but investors keep trying. Why not. If you find a few companies before they take off, you can make a lot of money.
Here are a few ideas to help you find hidden gems.
- Diversify your assets across multiple stocks and sectors. Widen your net.
- Invest in moonshots. Moonshots are risky and speculative, but you can generate significant returns if they pay off. Limit your allocation to 3% to 5% of your investment portfolio.
- Look for stocks with solid moats and little competition.
- Read as much as possible to find innovative companies. In addition to reading popular periodicals like the Wall Street Journal or Barron's, look to trade magazines and industry journals.
- Practice patience and courage. It takes strength to own the best-performing companies because they're volatile. For example, Amazon fell 95% in 2001. Last year, Tesla slid more than 70% from its previous high. If you own stocks at the peak, you must hold them in the valleys.
- High-flying stocks are expensive. The average PE ratio for the Magnificent Seven is 106. You will pay up in valuation to buy solid-performing stocks. Coca-Cola is a company that delivers consistent performance, and the market rewards it with a high multiple. The 10-year average PE ratio for Coke is 27.29. A company with a low PE ratio could be a value trap. For example, the average PE ratio for Intel is 10.6, and the stock is down 47% from January 2000, 23 years!
- Review and rebalance. Stocks and trees don't grow to the sky, so reevaluate your holdings often. Do you remember Sears, Roebuck & Company? It was once the most dominant company in America, now it's a former shell of itself, and the stock is worthless.
- Ride your winner for as long as possible. One Secretariat is worth more than a thousand average racehorses. If you own a great company, let it run.
They fought for the ones who couldn't fight for themselves, and they died for them, too. All to win something that didn't belong to them. It was - magnificent. ~ Emma Cullen, Magnificent Seven
July 8, 2023
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.
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