If referencing the market against the Dow Jones Industrials, you’re obsolete, living in the dark ages of the 1950s, when technology as a market sector was insignificant. Let’s leave the Dow Jones to broadcasters with blown-dried hair.
Sixty years ago, Bell Laboratories invented the transistor and licensed it to all comers. IBM IBM was notable then for its great electric typewriter. The 360 Computer was years away. My first job on Wall Street, the house gave me a portable adding machine to do my numbers. I taught myself to use a slide rule for multiplication and division. Partners left over from 1929 termed us as statisticians.
Yes, there was Polaroid coming out with color film, but the Street’s captivating concept was razor blades, not cloud computing. Gillette’s stainless blade was the standout along with Procter & Gamble’s PG Pampers, Diet Coke and Philip Morris’ filtered ciggies – all subject to daily repeatable usage. Later Syntex’s “The Pill” took over along with Boeing’s BA 707 jet aircraft.
Contrast such old staples with past week’s oil futures plunging into negative numbers while two-year Treasuries sold to yield 19 basis points and 10-year paper at 0.62%, down from over 2% past year. The market needs to deal with the deflationary wet blanket covering energy, industrials, financials, almost everything except technology. Amazon AMZN , Microsoft MSFT and Netflix NFLX soldier on. Technology weighting in the S&P 500 Index now exceeds 25%. Only the tech bubble of 2000 saw it higher, at 33%.
Energy weighs in at 3.3%, less than the market cap for Amazon or Apple AAPL . Only utilities and real estate are lesser weightings. Back in 1990 technology was a sliver of the index, maybe 5%, comparable with financials, now under a 10% weighting. Dominant components were industrials and consumer staples like Coca-Cola KO .
A decade later, around 2000, technology and financials mushroomed into dominant sectors. But, at the bottom of the market in 1991 tech was at a 6% weighting. Pre-bubble, 2000, iconic tech houses sold at 60 times earnings, but by 2001 had melted down to 20 times earnings. Then, players craved to own properties like Sun Microsystems and Oracle ORCL .
I was caught up in oil service plays, then as now, that energy futures would trade over $100 a barrel. Now, I’ll settle for $40. Halliburton HAL was a favored position. When WTI quotes broke sharply, I banged it out. At least today, tech is powered by rising earnings, not just elevated price-earnings ratios.
General Electric GE and Exxon Mobil XOM held number one and three positions, 1991, in the S&P 500 Index. General Electric’s market cap was $415 billion, but now an insignificant number. In the 2014 standings, Microsoft stood at $402 billion. Apple was numero uno at $667 billion. Currently they are both trillion-dollar capitalizations but despite all the good news, Apple has appreciated under 50%. Microsoft is ahead 150%. My money rests on Microsoft. Apple, for me, is too tough to model, particularly mobile phone unit volume and pricing.
Management dynamics count. Wells Fargo WFC six years ago was a decidedly bigger market valuation then JPMorgan Chase JPM . No longer. Morgan is twice the size of Wells Fargo which is a major holding of Berkshire Hathaway’s BRK.B . General Electric then, the sole industrial left in the top 10 before collapsing into single digits. Reserves for long-tailed assets were woefully inadequate. Too many acquisitions proved disasters which left goodwill to be written off.
Reminded me of American International Group AIG , WorldCom and Enron. All creative accounting jobs that fooled the Street for years and years. When macroeconomic forces are scary or a big yawn the market overfocuses on story stocks that can self-destruct.
I own Amazon and Netflix, but I’ve more money in Halliburton, Freeport-McMoRan FCX , Teva Pharmaceutical Industries and Williams. You could put them in your back pocket in terms of market capitalization. What I yearn to own are the great franchise operators like Walt Disney DIS and American Express AXP , both down around 40% from their highs. But it’s still too early. Nobody can dodge market volatility. Throw in JPMorgan Chase but not Wells Fargo.
While writing this piece I watched Schlumberger SLB bounce nearly 10% so I bought more Halliburton. Forget about the concept of owning quality paper. Junk bonds get my money, not AAA corporates yielding under 3%. Leave Coca-Cola to Warren Buffett. It’s off 25%, the cola story played out in terms of per capita consumption.
The BKX Index of bank stocks was cut in half during the opening quarter this year. Our financial world is willful, capricious and overreactive to change. Make a mistake and you’ll go shirtless. Even Facebook and Alphabet which are balance-sheet powerhouses with position on the board, are no higher than a year ago. Halliburton then was much beloved, ticked at $30, not nine bucks. Citigroup C , from its yearend high lost 50% of its value. No reentry for me until I can build an income statement to believe in.
Berkshire’s huge overconcentration in financials happened over time, a great play in the value sector of the S&P 500 Index. End of March, financials comprised 35% of portfolio assets, at yearend, 40%. There was severe portfolio bruising, a $40 billion shrinkage here. Berkshire’s premium over book value declined below 20%.
When playing with ragamuffins, I keep in mind Michael Milken’s MAD ratio. This is market value of a company’s debt to its equity content. I’m comfortable with a one to one ratio, where Halliburton trades. I’m wary of companies with sizable goodwill on their balance sheets. Big write-downs happen in down cycles, what we’re experiencing all over the board.
Good stock selection won’t work magic and bail you out if sector concentration is off-base. Look what’s happened to Buffett with 35% of Berkshire’s portfolio in financials. Amazon and Netflix slot into the special-situation category as beneficiaries of the coronavirus setting. Ironically, both sell on undefinable futures. Analysts extrapolate numbers three years out to rationalize present stock prices. Forty-two like Amazon, with a couple of neutrals, one nay.
Normally, such a one-sided reading is a warning sign of overvaluation. But, at 9:30 a.m. as the animals spring from their cages, there’s Amazon, up 50 points. My mind drifted elsewhere. Was it time for great franchises like Walt Disney, victimized by the coronavirus shut down? What about American Express and JPMorgan Chase? Comeback? Comeback? Soon, but not yet.