Many stock-market bears are comparing today’s “FAAMG” stocks to the “Nifty Fifty” stocks that dominated the US market in the early 1970s – and which ended in the 1973–74 bear market.
In fact, the story of Nifty Fifty is not as scary as the bears make it. Those stocks eventually outpaced their bear-market losses and outpaced the S&P 500 SPX.
At first blush, FAAMG Stock – Facebook FB,
, Apple AAPL,
, Amazon. AMZN,
And Google GOOGL of the alphabet,
– Look similar to Nifty Fifty. Even though these five companies represent only 1% of firms in the S&P 500, they account for a quarter of the index’s total market cap. According to FactSet in Nifty Fifty’s stock at the market peak of December 1972, they are sky-high P / ES – their average, currently 51.0, based on 12-month earnings.
Despite a major decline in Nifty Fifty stocks during the 1973–74 bear market, they eventually came forward, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School. He came to this conclusion by tracking the performance of the Nifty Fifty List from Morgan Guaranty Trust – a portfolio of all 50 stocks bought at its peak in December 1972, ahead of the market by the mid-1990s.
As a double-check to this conclusion, Seagal then calculated the P / E ratio at which each share of Nifty Fifty should have traded in “1972”, assuming that an investor had correctly guessed How much will his earnings increase over the next several decades. They found that their P / E ratios on the whole were justifiable, and that many of the individual Nifty FIFTY companies were not actually evaluated.
To be sure, realizing the market beating potential of the Nifty-Fifty will require heroic patience and discipline. These stocks lost more than the S&P 500 during the 1973–74 bear market, falling 45%. Some shareholders had the privilege of holding it for the long term. Nevertheless, it is up to the bears who use the Nifty Fifty analogy to accept that these stocks eventually outpace.
There is another way in which the FAAMG vs. NIFTY FIFTY analogy is not as scary as it first appears: relative to the overall market, today’s FAAMG stocks are less overvalued than the NIFTY FIFTY, which was at the December 1972 market peak.
It is depicted in the chart. At the peak of December 1972, the average P / E (based on 12-month earnings) of Nifty Fifty shares was 2.2 times that of the S&P 500. In contrast, the average FAMG P / E ratio today is 1.4 million. S&P 500.
What these data suggest is that investors should focus less on whether FAAMG shares are overvalued relative to the US market and overvaluation of the market. Even acknowledging that the current P / E ratio of the S&P 500 could be artificially inflated because of COVID-19, it still relates to what it calls the December 1972 Bull Market Peak But it was double. Just don’t blame FAAMG shares for that.
Mark Halbert is a regular contributor to MarketWatch. His Hulbert rating tracks investment newspapermen who pay a flat fee to be audited. It can be reached [email protected]
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