IQ Trends: "Why I Don't Own the Big 3 Techs"

08/03/2020 5:00 am EST

Focus: STRATEGIES

Kelley Wright

Managing Editor, Investment Quality Trends

Much of the S&P 500 returns come from just 10 companies that as a group are up 35% since the beginning of the year, observes Kelley Wright, dividend expert and editor of Investment Quality Trends — and a participant in the MoneyShow virtual event, August 3-5. Register for free here.

Those ten stocks are Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Google (GOOGL), Facebook (FB), Visa (V), Mastercard (MA), Nvidia (NVDA), Netflix (NFLX), and Adobe (ADBE).

The other 490 stocks in the S&P 500 index are down in the double digits. To really see how bifurcated the market has become, though, consider that just three stocks make up about 16% of the S&P 500 and over 33% of the Nasdaq: Apple, Amazon and Microsoft. Now consider that the combined valuation of those three stocks is almost $5 trillion.

Just announced is that Apple will split 4 for 1, and of course they beat their earnings estimates. At $100 per share it will be much more affordable than the current $400 per share. Now, you will need to buy 4 times as many shares so as to not to be diluted, but why quibble about something so innocuous?

On the topic of the Big 3 — Apple, Amazon and Microsoft — I am often asked why we don’t follow them in IQ Trends. The reason is very simple, they don’t meet our criteria for what we consider Select Blue Chips — those stocks that qualify as investments for our long-term dividend focused purposes.

Microsoft will be eligible the earliest, in 2028. Apple in 2035. Amazon doesn’t pay a dividend so who knows if they’ll ever become eligible. And yes, meeting the Criteria matters. The Big 3 are obviously great companies, today.

Technology is weird, who knows what will grab consumers attention tomorrow, next week, next year? If you will remember there was a thing called the Tech Wreck, aka the dotcom bust. Kodak and Polaroid were once the highest of flyers. Oh sure, I can hear it now, “But that was then, this is now, and the technology is totally different.”

Maybe, maybe not, only time will tell. The bottom line is I have no way to value those companies because they have not paid a dividend long enough to identify their respective repetitive dividend yield patterns. When I can, when they meet the Criteria, then great.

I hear a lot of people say we will eventually get a vaccine and then everything will return to normal. I am not so sure because a lot of companies, institutions, governments and individuals have learned that they can do things differently and what once was thought required or necessary may no longer be the case.

Improvise, adapt, overcome, these are the agents of change, and often you do not realize what has changed until after the fact. In other words, this is all going to take time to process.

One thing I do not think will change is that fundamentals and valuations matter. At some point the economy and market will have to survive on its own without permanent intervention.

Yes, there will be pain, but sometimes risk is painful. There are no guarantees in investing, only opportunities. There is an entire generation of market participants who know nothing about research and analysis, only that the Fed has their back.

That is not investing, it’s play acting like investing. One day they will find out you do not get a participation trophy. Trophies are for winners.

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