Mega Cap Technology Stocks on the Rebound

July 26, 2021

During Q2, we maintained a positive outlook for the mega-cap tech names in our strategy, and our patience is now being rewarded as the rate of change on 10 years settles down driven by commodity price abatement as consumer demand begins to shift between high priced goods to services.

Since the end of March 2021, the top 5 mega-cap technology names in the S&P 500 plus Adobe have, in aggregate, have outperformed the S&P 500 and QQQ by as much as 2X. We remain keenly interested in this group of companies because these 6 stocks represent upwards of ~22% of the weight of the S&P 500 by market cap.

Let’s take a deeper look at valuations since the most recent appreciation in price:

Aggregate performance relative to S&P 500:

The equal-weighted average return of the 6-stock mega-cap tech composite outperformed the S&P 500 by a factor greater than 2X (9.6%) from 4/1/2021 to 7/12/2021.

Aggregate performance relative to the QQQ:

The equal-weighted average return of the 6-stock mega-cap tech composite outperformed the QQQ by 7% from 4/1/2021 to 7/12/2021.

Valuations Revisited – PE F12M Relative to S&P 500:

The latest outperformance of the mega-cap tech names has not put a dent in the valuations relative to the S&P 500. In the PE F12M chart below, you can see that the equal-weighted average company in the 6-stock mega-cap tech composite is trading at a 73% premium where the 15-year median value is a 103% premium. Despite the most recent price appreciation in the mega-cap tech group, these names are still trading at 9-year lows on a PE F12M basis relative to the S&P 500.

Valuations Revisited – PE F12M Relative to QQQ:

The latest outperformance of the mega-cap tech names has not put a dent in the valuations relative to the QQQ either! In the PE F12M chart below, you can see that the equal-weighted average company in the 6-stock mega-cap tech composite is trading at a 29% premium where the 15-year median value is a 56% premium. Despite the most recent price appreciation in the mega-cap tech group, these names are still trading at 12-year lows on a PE F12M basis relative to the QQQ.

Conclusion

The value rotation that began at the bottom of the COVID crisis has pushed relative valuations of some of the fastest-growing, most earnings stable mega-cap tech names to record low valuations we have not seen since the recovery of the Great Financial Crisis.

• Relative to the 15-year median PE F12M of the S&P 500, the 6 mega-cap tech names are, on average, 30% undervalued.
• Relative to the 15-year median of the PE F12M of the QQQ, the 6 mega-cap tech names are, on average, 27% undervalued.

These 6 mega-cap technology stocks have such a large weight in the S&P 500, topping ~8 trillion in market capitalization, that their valuation influence is equal to the bottom ~350 names in the S&P 500 by market capitalization. From a strategist perspective here at SPG, we never take our eyes off this influential group!

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO | CSA, NSSA