#bumble | #tinder | #pof Big Tech Weighs Too Heavily? Feast on These Stocks Instead.

FAANGs? No thangs—I don’t care for the acronym. Too menacing, plus the G should really be an A for

Alphabet.

My colleague Al Root argues that

Microsoft

and

Tesla

deserve to be counted among this pack of world-beating stocks.

I recently factored that into a deep-dive analysis using Scrabble tiles, and came up with A FAT MAN. Maybe it’s not perfect, but what it lacks in gender neutrality and body positivity, it makes up for with metaphorical resonance. This pandemic, I can verify, has been making A FAT MAN even fatter.


Apple

(ticker: AAPL) is up 50% this year;

Facebook

(FB), is up 24%;

Amazon.com

(AMZN), 63%; Tesla (TSLA), 406%; Microsoft (MSFT), 29%; Alphabet (GOOGL), 11%;

Netflix

(NFLX), 45%. This has been a blessing for

S&P 500

investors, who have exposure to all but the T, in proportion to each company’s considerable stock market value. The index has returned 5% this year, including dividends, even though the latest consensus guess on its underlying earnings has them falling 19% from last year’s level.

That raises the question of whether the index has been thrown out of whack, and whether it will ever be thrown back into whack, a process more commonly called reversion to the mean. The top five S&P 500 companies recently made up 23% of the index’s value. They’re impressive companies, all right, but the average weighting for the top five over the past decades is a mere 14%.

Or look at valuations. Putting aside this year’s earnings decline, the S&P 500 trades at 21 times last year’s record earnings. The historical average is closer to 15 times. There are ways to gently trim A FAT MAN’s portfolio weighting without feeling deprived of stocks.

Like adding small-caps. Wait! Don’t go. Let me explain. There used to be something called the small-company effect, whereby up-and-coming businesses, on average, tended to enjoy better long-term stock performance than well-established giants.

Lately, of course, the small-company effect has been thrown into reverse. The S&P 500 has returned 90% over the past five years, versus 40% for a sibling called the

S&P SmallCap 600.

That has skewed pricing. Small companies are now nearly 30% cheaper than large ones, relative to last year’s earnings. There’s no need to load up on small-caps, but investors who want to add a smidgen can do so with index funds that hold them exclusively, like
Fidelity Small Cap Index
(FSSNX), or ones that hold companies of all sizes, like
Vanguard Total Stock Market Index
(VTSMX).

On the subject of unexciting things that might be good for you, consider non-U.S. stocks. As a young man, I was a world traveler, but since having kids, I have just enough wanderlust for the trip from Mexico to Canada at Epcot’s Food and Wine Festival. Likewise, it’s difficult to get excited about a five-year average return of 2% for MSCI’s all-world, ex-U.S. index when its U.S.-only one has returned 11%. But Schwab investment strategist Jeffrey Kleintop points out that, although the U.S. index has continued outperforming since the end of April, the ex-U.S. one has done better if the companies in both indexes are given equal weightings. In other words, without that handful of tech behemoths dominating the U.S. market, overseas stocks have compared well. Index funds like
Schwab International Index
(SWISX) can add easy exposure.

Looking for something with more pizazz? Goldman Sachs recently identified what it calls the Future Five: companies with large addressable markets, high barriers to entry, and rapid sales growth, which its analysts think might gradually creep up in the size ranking for S&P 500 companies. They are:

Intuitive Surgical

(ISRG), a maker of medical robots;

Autodesk

(ADSK), which sells design software for things like construction and manufacturing;

ServiceNow

(NOW), whose software handles workplace activities like internal audits, recruiting, and contract management;

PayPal Holdings

(PYPL), the digital payment company; and

Vertex Pharmaceuticals

(VRTX), which has treatments for muscular dystrophy and is pushing into blood disorders.

The SAVIPs? Surely not. My Scrabble analysis hasn’t turned up anything workable for these five. For now, just call them the InAutoServicePayVerts.

I spoke this past week with Stephen Schwarzman, co-founder of the

Blackstone Group

(BX), a massive player in private equity, real estate, and hedge funds.

Blackstone stands to reach new types of investors, because the Labor Department recently said 401(k) providers may add certain types of funds that dabble in private equity.

If you’re not familiar with private equity, picture the stock market, and then take away the market part. What’s left would be ownership stakes in companies, without the ease of buying and selling them as fast as a Robinhood trader can say, “Pass me another hard seltzer, bro.” Private-equity funds typically have long lockup periods, and their managers can use leverage, and meddle in the companies they invest in, or buy entire companies.

Blackstone ended its most recent quarter with an industry-record $156 billion in dry powder. Schwarzman says it has recently focused its spending on life sciences and technology. Purchases include Bumble, a dating app; Ancestry.com, for genealogy, and Oatly, a supplier of oat milk. He says Blackstone now owns a billion square feet of warehouses, making it the firm’s largest real estate category, and providing favorable e-commerce exposure. It has also bought houses and apartments in the suburbs.

I asked if cities will come back. “To the extent that governments fall short, the recovery will be much longer, and to the extent that governments are excellent, I don’t think it will be a long-term issue,” Schwarzman says. Among cities he mentioned favorably were Miami, Austin, and Dallas.

Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.




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