The corona crisis has been, so far, nothing less than a bonanza for the giant companies. Yes, we are talking about the technology and media giants, who enjoyed good days even before the crisis, but with the outbreak of COVID-19 and the changes it brought to our lives, they only got even bigger.
The reference is to the top five of the S&P 500 (Microsoft , Dark , Amazon , Alphabetical (Google) And Facebook, or rather Meta ). These currently constitute 24.2% of the index, compared with 17.7% of the index in 2019. The situation on Nasdaq is even more extreme: where these five companies make up 42% of the index (by the way, on Nasdaq Tesla and-NVIDIA Bigger than Facebook and Google). That is, over the past two years, U.S. stock indices have undergone a process of significant centralization – a result of dramatic overperformance by these companies over the rest.
Even before the Corona crisis, these giant companies enjoyed rapid growth, high liquidity and ever-increasing cash flow, which naturally led investors to them as an investment channel that provides both growth and protection. These giant companies have also benefited more over the years from a low interest rate and inflation environment, and they have been riding the wave of the new economy.
The much liquidity, and the lack of significant intervention by the regulator, did not prevent the giants from continuing to grow even as they used their power and cash in their coffers to make acquisitions of other companies, further establishing their technological status and control over markets. Of competing products and services.
Just for example, Facebook has made dozens of purchases in recent years, the largest of which was the purchase it made during 2014, the purchase of the free WhatsApp app. Another well-publicized acquisition was of the Instagram sharing app, but the list is very long, and includes additional virtual reality acquisitions, which recently spawned Meta.
Google is also not free from acquisitions of dozens of companies, including Motorola Mobility, Wise, Boston Dynamics and many others. A similar image can also be found at Microsoft, Amazon and Apple.
Then came COVID-19 and intensified these trends, as radical changes in household behavior due to restrictions on economic activity only increased the use of digital media platforms, increased product purchases (via Amazon and Apple) and increased screen time for all of us (Google, Facebook and believe it or not Also Microsoft).
An average increase of 31% per year in earnings per share
To get an order of magnitude of how much these companies wanted long before everyone else, one only has to look at the increase in their profits – the big five have managed to yield a 31% increase in earnings per share over the last decade, on average per year, while overall, the companiesS&P 500 Managed to generate a 7% increase in earnings per share.
Looking ahead, the top five are currently trading at high multiplier levels, with an expected multiplier of 35.6 and an implicit growth in profits of 10.5% in the coming year.
The Big Five rose sharply in 2021 as well, with nearly double the 495 shares of the S&P 500, but this year they did so in a very sharp rise in inflation, while the Fed and other central banks move in the direction of a much narrower policy in 2022.
In our view, the macroeconomic environment we are entering in 2022 is likely to be much more challenging for the stock markets. Draining liquidity from the markets, economic slowdown and a continuous disruption of supply chains – which will continue to push prices up – all of these will weigh on stock markets that have gone through three years of particularly high returns, with the technology and media giants at the forefront.
It is advisable to improve positions in the stock portfolio
With extremely high multiplier levels and markets awaiting correction, there seems to be a high risk to technology and media giants in the coming year. Therefore, with the onset of the new year, we would recommend improving positions in the stock portfolio. The winners of recent years will not necessarily be the winners of the coming years, and of the other 495 companies in the index, there is quite a bit of value – which is difficult to see today due to the large concentration in the stock market. 2022 will be a year to know how to choose sectors and stocks, as not every purchase will win.
It should be noted in this context that in the last six months, in a significant number of shares in the various fields of technology and digitization, there has been a very sharp decline from the peak levels. One can already talk about the contraction of the bubble as a result of the entry of a lot of hot air into the system, which inflated second- and third-class stocks to an irrational value. Some of these stocks are already an investment opportunity today, but a lot of patience is required, and an understanding that even as the value begins to look more attractive, the downward trend can still continue.
Among the stocks we at Psagot recommend you can point to companies from different and diverse fields. Interesting examples are the cyber security company Cloudflare (NYSE: NET), which mimics about 40% of the peak it reached about a month ago, and a company Fiverr The Israeli (NYSE: FVRR), which erased about 65% of the record value it reached last February.
Another Israeli company with a more modest value is a company SimilarWeb (NYSE: SMWB), which analyzes data of web surfers to help companies market their activities compared to competing activities.
There is another long and not inconsiderable list of stocks that are starting to look more interesting. But as we noted, it is important to remember that declines in these stocks may not have ended and investors, especially in technological areas with high multipliers – which require a very long investment horizon – need a great deal of patience and forbearance, after all we do not know how to time markets.
There is no investment advice / marketing and / or substitute for advice / marketing that takes into account the data of each person and / or a substitute for the reader’s discretion and does not constitute an offer to purchase securities.