Are the Mag-7 stocks overpriced?

February 21, 20244 Comments

Before we being with the feature topic of todays blog – a heads-up: I’m on Bloomberg BNN MarketCall this coming Monday February 26th at noon. Its a call-in show, and I’m happy to answer your questions on individual stocks, or discuss Technical Analysis techniques.

I do appreciate it if you mention you read my blog when you call in. My shows have been getting above average call-in volumes, so you should make a point of calling near the beginning of the show to get priority.

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BNN MarketCall: Monday February 26th at 12:00 noon

 

Another contrast & compare day. Mag 7 PE ratios vs. top 7 “Nifty Fifty” stocks

Magnificent 7

Here are the trailing and forward PE ratios of the Magnificent Seven stocks as of Feb 20, 2024. Courtesy Rosenberg Research.

Here is the SPX, highly influenced by the FAANG’s, and (with some crossover) now the MAG-7 stocks:

Nifty Fifty

Not to be confused with the Indian stock exchange, the Nifty Fifty were a group of premier growth stocks, such as Xerox, IBM, Polaroid, and Coca-Cola, that became institutional darlings in the early 1970s. All of these stocks had proven growth records, continual increases in dividends, and high market capitalization. Individual investors and institutions loaded up on these “one-decision stocks”. Analysts claimed that the only direction they could go was up. At the time, 50, 80 or even 100 times earnings seemed a reasonable price to pay for the world’s preeminent growth companies.

Tell me that you don’t spot the similarities in investor attitudes between the Mag-7 and the Nifty 50:

Forbes magazine: “What held the Nifty Fifty up? The same thing that held up tulip-bulb prices in long-ago Holland—popular delusions and the madness of crowds. The delusion was that these companies were so good it didn’t matter what you paid for them; their inexorable growth would bail you out. It was so easy to forget that probably no sizable company could possibly be worth over 50 times normal earnings.”

Compare the following chart to the PE ratios for the Mag-7’s above. Notice the similarity? courtesy Rosenberg Research:

 

Here is the DJIA (driven by the Nifty’s) chart in the 1960’s. Much like the SPX is driven by the MAG-7’s today.

See my notations:

Conclusion

The Nifty-50 stock prices, and subsequent market action, remained elevated for several years. Until it ended. First with a multi-year consolidation pattern. Then a crash. There’s probably growth left in SPX, driven by the MAG-7 group. This, assuming the crowd continues to ignore valuations as they did in the late 1960’s /early 1970’s. But nothing goes up forever.

Still…No sense predicting when the current craze ends. But it will. So enjoy it while it lasts.

4 Comments

  • bce is looking great here right tbthe 200 month MA. and previous longer term support levels

    Reply
    • Yes, we sold it when it broke down through $55. Would be interesting if it can double bottom off of $50. First target $55, then if that cracks (hard to say, given their woes), higher

      Reply
  • Have another great appearance on Market Call this Friday. Appreciate your wisdom on investing. What I found interesting on the P/E snapshot & 10, 20, 30 & 40 yr performance of 7 stocks in the Nifty Fifty is two things. The long term annual returns on those stocks delivered REAL return over the long term .. AND … they all still exist with most still thriving. I think that is really important to long term investors & even traders. I spent most of my 40 yr career in consumer products with P&G & Coca Cola. No comparison between the two. In fact, nothing I have ever seen compares with P&G in terms of their excellence at what they do. Coke is not in the same league. Moral of that rant? P&G should be a core holding that you trade around. Load up when it falls sharply & lighten up with it pops. You just cannot lose.

    Reply
    • Thanks Gary. Yes, PG is a consumer staple. Unlike “growth” stocks, which rely on emerging products or services that will certainly outperform markets for a while, until they become overvalued. Consumer staples, largely, are companies that supply lower-growth revenue by selling products that will always be around. I have a former exec with a large food company as a client. He once gave me a tour of one of the facilities, taught me a bit about how staple industries operate and their challenges, etc – I appreciate the staples industry for their longevity. And yes, they sometimes fall out of favor, particularly when investors are focused on the new growth stocks like internet, FAANGS, AI, or even cyclicals like oil, etc. That, or when inflation hits their base materials costs. But the good ones always seem to come back. After all, ya gotta brush your teeth, eat, and blow your nose!
      I do tend to be a trader, and exit/enter the staples as they swing. But, to your point, over the long run they still do fine. FYI–we are into staples now, have been for most of the past year. They have done nicely, AI aside!

      Reply

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