It's Hard to Stay on the Leaderboard

As you know, we are proponents of broad diversification. When you own index-based investments for years and decades, the best performing stocks often expand manyfold and drive the performance for the whole market segment. This is a good thing because it is generally hard to know which stocks will prove to be positive outliers in the future. Past performance is just that. Investors can only capture the investment returns that lie ahead.

A few years ago, our oldest son Rye introduced me to the Acquired podcast. I have been hooked on it and quite a few others ever since. Recently, I listened to their latest segment on Microsoft (e.g., Microsoft Volume II). I wanted to share some things that I found interesting and surprising during the 14-year span from early 2000 through early 2014 when Steve Ballmer served as the company’s CEO. While the company’s sales, earnings, cash flow and other metrics expanded nicely over this period, the stock was a dog. The chart below shows the share price (top portion) and underlying EPS and PE ratio are in the bottom frames.

Source: FactSet

As the table on the prior page shows, MSFT failed to make a new high during this 14-year period, despite very significant growth in its EPS. The key reason why the stock was disappointing to own was because at yearend 1999 it traded for roughly 70 times its EPS (earnings per share). Over the ensuing years, its valuation metrics came down significantly despite significant growth in per share sales, cash flow, earnings and book value. Since 2014, MSFT has once again been very pleasing to own in large part because of its success in its cloud business (e.g., Azure) and a significant rise in its valuation metrics. I have included a table that shows MSFT’s high, low and closing price from 1999 thru recent days in an endnote.ⁱ Please also see a final endnote that shows MSFT’s sales, earnings, cash flow per share data from FY 1999 thru FY 2014.ⁱⁱ

I want to conclude with a series of tables that show the top 20 U.S. stocks by market cap at various times. If you compare these tables, you will see that changes at the top are common. Please also note most individual company’s market caps ebb and flow over time. Some former darlings are far below the list of top 20 most valuable stocks today. Only 5 stocks remain on the list today that were on the 2000 top 20. Indeed, some former titans including WorldCom, Enron and AIG lost nearly all of their value even though they were once high on the list of most valuable stocks. Today, MSFT along with AAPL and NVDA each have a market value in excess of $3 trillion. Time will tell whether or not these highly profitable ‘franchise stocks’ will stay at the top of the leader board in the years and decades ahead. That may or may not happen. Even if they do, investors are wise to acknowledge that their share prices might fall precipitously along the way and/or that they may not continue to be leading contributors. Recognizing that markets serve up surprises, often when least expected, we will continue to allocate into market segments that perform differently over time.

Source: FINHACKER.cz

Clearly, staying in the top 20 of the S&P 500 is challenging. Even for those that do, significant increases and decreases in market value are noteworthy over time.

As always, we welcome your thoughts and questions. Most importantly, we greatly appreciate the opportunity to serve you.

Warmest regards,

Richard Jones, CFA

Partner, Harmony Wealth Partners

Source: macrotrends.net

Any opinions are those of Richard Jones and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Past performance is not a guarantee of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors.
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