By James K. Glassman
From Kiplinger’s Personal Finance
It has been a rough year for the stock market but even more so for Mega Four tech stocks: Apple, Microsoft, Alphabet, and Amazon.com.
Over the past five years, their share prices have more than tripled, and each has a market cap of more than a trillion dollars. But investors are bewitched by what behavioral economists call “recency bias,” or putting too much emphasis on the latest events, so losses in these four stocks over the previous few months are prominent in investing decisions.
Smart investors take a long view, both forward and backward. They look carefully at a company’s progress over the years and then try to forecast a decade out. With this kind of analysis, the 2022 decline is clearly a buying opportunity for three reasons:
Each of the Mega Four started with a single big idea: search-based advertising for Google, personal computing for Apple, online shopping for Amazon, and operating-system software for Microsoft. None has abandoned its original business, but all have moved into other sectors. Those transitions have been impressive and nearly unique among corporations. The flexibility that the Mega Four have displayed bodes well for future adaptation to changing markets.
The reason the Mega Four have so much cash is that they are absurdly profitable. Take return on equity, which is net income divided by shareholders’ equity. According to a Nasdaq primer, return on equity “enables investors to identify companies that diligently deploy cash for higher returns.” Apple’s return on equity as of early August, for example, was 153 percent. In other words, raising $1 million in equity produces profits of $1.53 million! For comparison, Zack’s, an investment research firm, reports that the average for the mini-computer sector is 19 percent.
These companies are profit machines, even when the economy appears to be slowing down as the Federal Reserve raises interest rates to thwart inflation.
These stocks are cheap. I can’t predict whether they’ll get cheaper in the short run, but it’s clear that becoming partners in some of the best businesses in the world is a better deal today than it was at the start of the year.
Alphabet’s shares have dropped from $148 earlier this year to $102 in mid-September, Amazon is considerably less expensive than it was two years ago, and Microsoft was down nearly $98 a share in mid-September since it traded at $342 in November 2021.
The main case for the Mega Four is their success. I realize that the market battlefield is littered with giant winners that have become losers, General Electric being the prime example. There are no guarantees in investing. But when the market sours on companies because of the state of the economy, it’s a good time to be buying the best.
(James K. Glassman is a contributing columnist at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
©2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
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