The Retired Investor: The Magnificent Seven

Last month, a new term for those stocks that have led the stock market higher this year surfaced on Wall Street. Investors have anointed Apply, Alphabet, Amazon, Microsoft, Meta, Nvidia and Tesla as the new leaders in the equity market.

 

It isn't the first time a group of stocks have captured the imagination and money of the investing community and it won't be the last. FANG, for example, an acronym that represented Facebook (now called Meta), Apple, Netflix, and Google have been a favorite investment group that has rewarded investors for buying and holding over the last decade or so.

 

Through the decades, there have been many such groups that provided outperformance and led to the market. My first experience with this groupthink type of investment was the Nifty Fifty. These stocks represented 50 large-cap stocks that were viewed as stable over long periods. Solid earnings growth was the key indicator to qualify for inclusion in this group. All of them were recommended as buy-and-hold equities.

 

Investors assigned high price/earnings ratios to these favored stocks and, in some cases, they were trading at fifty times earnings or more compared to the long-term market average of 15-20 times earnings. Investors would find it hard to believe some of the names in this list of darlings during the 1960s and 1970s. Dow Chemical, Gillette, JC Penney, Polaroid, Sears Roebuck & Co., Xerox and Joseph Schlitz Brewing Co. were all in demand. The group propelled a bull market of the 1970s and was also credited with causing a decline in the markets, as most of these stocks crashed and burned in the early 1980s.

 

In the late 1990s, Oracle, Intel, Cisco, and Microsoft, dubbed the "Four Horsemen," were the favored group. In the mid-2000s, emerging markets were all the craze. The BRIC nations (Brazil, Russia, India, and China) could do no wrong and lead markets higher on a global basis. The performance of each of these groups outperformed the overall averages consistently before losing favor.

 

Over the last decade-plus, the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) rewarded investors and continue to do so today. Since the beginning of the year, the gains in the stock market have been largely credited to the Magnificent Seven that are almost all up 90 percent thus far. Driving these incredible gains is their ability to generate huge profits and reward investors with generous dividends and share buybacks.

 

Investor fascination with artificial intelligence has also provided another reason to invest in these companies, since most of them are considered leaders in generative AI. However, a word of caution is warranted. Technically, the Magnificent Seven stocks are fast approaching price exhaustion. For those who might want to buy into this group, I would wait until prices come back to earth before pulling the trigger. 

 

The good news for equity investors is that in the periods where short-hand acronyms or labels identified a winning set of stocks, bull markets occurred and continued for several years. It could be a coincidence. There is no data to suggest any group's performance can dictate where the markets overall are going next.

 

At best, I would say that the labeling of a new group of winners does reflect a change in mood among the market participants. Investor sentiment seems to have shifted to the bullish side, despite fears of recession, prolonged inflation, and geopolitical risk. I expect it will continue.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.