Alaric Securities celebrates at Nasdaq MarketSite
January 17, 2024 | Issue 49

Magnificent 7 Stocks: From Nifty Fifty to Market Dominance

Nikolay Stoykov
Managing Partner at Alaric Securities
ollage of logos representing the Magnificent 7 Stocks: MSFT, AMZN, NVDA, META, AAPL, GOOG, TSLA - leading players in today's dynamic market

Trading and investing are professions like no other. Unlike most other professions where competency comes within a reasonable time of practicing, like 2-5 years, in trading, proficiency comes after at least 2 business cycles, usually at least 10-15 years. And this is only if the trader/investor is a good student of history.

One of the critical lessons that one needs to learn during that time is this straightforward fact – there is nothing new. The new thing you read about is only new to you.

How people perceive the future, value growth businesses and the bounds of those valuations are things anybody can study from history, except most market participants do not think those historical lessons apply to the present. But they do.

From Nifty Fifty to Magnificent 7 Stocks

The Nifty Fifty was before The Magnificent 7 – MSFT, AMZN, NVDA, META, APPL, GOOG, and TSLA. According to Wikipedia, the Nifty Fifty was the informal designation for a group of fifty large-cap stocks on the New York Stock Exchange in the 1960s and 1970s that were widely regarded as solid buy-and-hold growth stocks or “Blue-chip” stocks.

During the peak of the “Nifty Fifty” mania, stocks that were part of that group were selling at P/E ratios of more than 50, while the broader market was trading around a 15-20 P/E ratio.

So now that we know that a group of large-cap, well-performing stocks can trade at a 2-2.5 times higher P/E ratio versus the broader market, the question becomes how The Magnificent 7 stocks stack versus the broader market.

 ticker P/E Ratio capitalization in Tn USD weight in M7 portfolio
MSFT 37,45 2,866 23,58%
AMZN 81,35 1,6 13,16%
NVDA 72,34 1,35 11,11%
META 32,96 0,959 7,89%
AAPL 30,39 2,889 23,77%
GOOG 27,54 1,787 14,70%
TSLA 71,9 0,705 5,80%

As you can see, some of The Magnificent 7 stocks do indeed have a P/E ratio higher than 50, but MSFT, GOOG, AAPL, and META do not. The capital-weighted portfolio has a P/E ratio of 45,60.

Magnificent 7 Stocks vs. Broader Market Indexes

Here is how The Magnificent 7 stacks versus the broader indexes, according to Barrons:

Index P/E Ratio
Dow Jones 26,73
S&P 500 21,56
Russell 2000 25,98
Nasdaq 100 29,15
Magnificent 7 45,61

Yes, the Magnificent 7 is trading richly in the market. Still, one of the most essential characteristics of the Nifty Fifty Era was that all the stocks in that category were trading several times higher.

Let us offer an alternative explanation to what is happening with the so-called „Magnificent 7 stocks” group. Those stocks have one thing in common – they have outperformed the broader markets in the last year and over the long run. They have little else in common – they are in different sectors and have diverse operational and geographical exposure.

While some of those stocks do indeed look pricey, most of them – MSFT, AAPL, GOOG, and META trade at quite a reasonable premium. At the same time, the decision to buy AMZN at 81 P/E ratio seems like a stretch; given that broader markets trade between 25-30 P/E Ratio, buying AAPL at 30,50 looks quite reasonable. Indeed, Mr. Buffett, whose Berkshire Hathaway Inc. portfolio has 40% invested in AAPL, is not selling here.

Patterns and Acronyms: FAANG to Magnificent 7 Stocks

The truth is that before The Magnificent 7, there was FAANG (META, AAPL, AMZN, NFLX, GOOG), which remarkably resembles The Magnificent 7, minus NFLX ( Netflix). It isn‘t possible that the future of The Magnificent 7 stocks resembles that of FAANG stocks – some stocks will continue to grow. In contrast, others may experience troubles ahead and drop in popularity with investors.

It is just a pattern that recurs among investors, analysts, TV journalists, and people – everybody loves to find a shortcut to investing. This love for simplification tends to exhibit itself in catchy names like BRICS, Nifty Fifty, FAANG, or Magnificent 7.

The truth is that behind the catchy acronyms that are easy to remember, the individual members of the group have very little in common and usually, just like in the case of FAANG, transform into another acronym – The Magnificent 7 in this case.

Individual Stories: AAPL, MSFT, GOOG, and META

The most important thing for investors is to realize that three of the largest companies in the Magnificent 7 stocks– AAPL, MSFT, and GOOG, which are also some of the most significant components in the S&P 500 and Nasdaq 100 Indexes, trade at very reasonable P/E ratios.

For example, while the Magnificent 7 stocks comprises 27,8% of the S&P 500 index, 19,7% of the 27,8% is AAPL, MSFT, GOOG, and META. The capitalization-weighted portfolio of the four stocks has a P/E Ratio of 32.6 – hardly an excessive valuation.

The Bottom Line

All the gloom and doom talk about major indexes crashing because the Magnificent 7 stocks trade at a high P/E ratio and that those stocks now account for a large portion of the major markets like the S&P 500 ignores the fact that the stocks in that group are quite different. They have performed differently over the last 10-20 years and most likely will face diverging prospects.

The only thing they have in common is that they have performed very well in the previous 2 years. Yes, the fact that those 7 stocks now account for close to 28% of the S&P 500 is a concern if these stocks continue to be highly correlated. But that is very unlikely! Some of the stocks in the group of Magnificent 7 indeed have a high P/E ratio, but none of those expensive stocks account for more than 3,5% of the S&P 500 index.

Yes, MSFT, AAPL, GOOG, and META represent 19,7% of the S&P 500 index, but their valuations are not excessive, and as Warren Buffett says, “Diversification is an excuse for ignorance.”


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