Customers in line at Apple store (Photo by GIUSEPPE CACACE / AFP)
Throughout the 2020-21 Covid period, Apple AAPL consistently held the #1 spot in market capitalization. Moreover, it led the stock market higher, single-handedly pushing the S&P 500 up an additional 5%.
Great! But, now what? That’s the right question. Many companies have seized the top spot in the past, but none held it forever.
Does that mean Apple is due to stumble? No, but it does mean its widespread popularity and ownership will not be permanent. In addition, its high status limits its ability to rise further, and it increases the risk of a minor hiccup producing a minor reversal that then builds up speed.
From a 4.5% market capitalization weighting in the S&P 500 at the end of 2019, its size has grown to over 6.8% currently.
Obviously, that rise was driven by AAPL’s 2-year stock superior performance. It returned 150%, triple the 49+% earned by the other 499 companies. Thus, it single-handedly pushed the S&P 500 return up to 54%. (All returns include dividend income.)
Then, there are the next three largest companies: Microsoft MSFT , Alphabet and Amazon. They, too remained at the top throughout the two years, also increasing their position sizes through superior performance:
Put all four together and their combined size rose from 15.4% to 21.3%, and their market capitalization-weighted performance was 121%. Thus, the remaining 496 companies produced a weighted return of “only” 42%, with the four pushing that overall S&P 500 return up 12% to 54%.
This table shows the data…
The top four weightings and performance
And this graph shows the performance…
2020-21 performance by top four vs indexes
The simple answer is: Because every stock that ever achieved the “forever best” status has done so: Pennsylvania Railroad, General Motors GM , IBM IBM , AT&T, General Electric GE , Coca-Cola, Exxon, Philip Morris, etc.
Nevertheless, that question is always hard to answer when the top stock is at the top. However, not owning it simply because it is at the top can be problematic for an investment manager. Until it does stumble, its size and performance can create a hole in a portfolio that doesn’t hold it. Even very active managers are loathe to do more than trim a top stock’s holding size.
During my investment career in which I selected, replaced and oversaw investment management firms in multi-managed funds, I saw and heard many examples of superior decisions and mistakes. Here are two examples regarding large, top performing stocks that had created an outsized index concentration.
The first was the head of Bank of American Investment Management Company (BAIMCO) who had been recruited from another firm for his market timing prowess. Accustomed to making sizable allocation moves, he decided to get out of oil stocks during the late 1970s. OPEC had driven prices up plus general inflation was high. As a result, oil stocks, with their valuable oil reserves, were had risen to especially high.
Unfortunately for the manager, they continued to rise. Finally, with his performance poor compared to other managers, he decided to jump back in. However, doing so in the mainstream companies would not help fill his performance hole. Therefore, he loaded up on tertiary oil companies and oil service providers. Unfortunately, again, the stumble happened, oil stocks dropped and the manager’s fringe holdings tanked. As a result, he was replaced at BAIMCO.
DuPont DD de Nemours (DuPont), a long-time major holder of General Motors stock, was in the final stage of a court order to divest and disperse the GM shares to DuPont’s shareholders. As a result, the DuPont Family Trust, a major holder of DuPont shares, received a large amount of GM shares. Not wanting to retain the heavy position, the Trust administrators decided to split the shares between two selected investment managers. The managers were given full authority to sell and reinvest whenever and however they thought best. The two were Mellon Bank in Pittsburgh (I believe) and Capital Guardian in Los Angeles.
I was told Mellon Bank chose to retain the shares. Robert Kirby was responsible for the Capital Guardian shares. He worked with the analytical team to thoroughly dig through GM’s operations and financials. GM stock was at its all-time high, and it was considered the leading company in the world. No one could find a negative issue. So, the decision was made to hold.
Kirby then left for the airport. As he waited in the terminal, he was hit with the thought, “It can’t be that easy.” So, he picked up the phone and said to sell it all. GM never sold at its 1965 high again, Capital Guardian grew and Kirby later became president.
We have a benefit from not being in the business and being compared to all other managers quarterly: We can invest how we see best with no repercussion except dealing with our own emotions. This reality means we are free to hold smaller amounts (or none) of Apple, Microsoft, Alphabet and Amazon now with the only “loss” being the missing out on whatever stock returns they produce (relative to what we earn from the other stocks we choose to invest in).
Making a decision now is important because 2022 promises to be different, with rising inflation, rising interest rates and a lessening of Covid concerns. Those differences don’t mean either a recession or a bear market is at hand. However, 2022 will be challenging because of the changes. And that is just the type of environment in which the old stock market winners are replaced by new, exciting trends and developments.
2022 offers unique challenges and potential
