This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 5, 2017).
Whatever you do with your post-Dow 22000 stock portfolio, history shows it pays to steer clear of the most-valuable U.S. company.
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That's right, it's time to sell Apple Inc.
This column isn't investment advice, of course. But far-fetched as it might seem, the record is clear. The S&P 500-listed company with the largest market value has steadily lagged behind the broader index over the past 45 years, accumulating a deficit of more than 8,000 percentage points, according to data compiled by Ned Davis Research Inc.
That means that the decision to buy the most-popular U.S. stock -- which at various times has meant AT&T Inc., Alphabet Inc., Altria Group Inc., Apple, Cisco Systems Inc., Exxon Mobil Corp., General Electric Co., International Business Machines Corp., Microsoft Corp. or Wal-Mart Stores Inc. -- has almost invariably cost investors significant sums.
Some of those firms continued to excel as businesses while at the top of the market heap, and others began to cool off. But firm performance is only part of the story.
More likely, the large gap -- a cumulative gain of 8,773% for the S&P 500 total return index, vs. 700% for the largest-stock group -- points to the limits of prospective returns on investments that have already appreciated significantly, as a most-valued firm's shares typically have.
"Momentum is a powerful thing," said Ed Clissold, chief U.S. strategist at Ned Davis Research Inc. But eventually, "large numbers start to work against you."
That dynamic may well extend to firms beyond Apple, given this year's frenetic technology-stock rally. The five biggest S&P 500 stocks now are the technology firms often extolled in the press and on Wall Street for their supposed alacrity as "disrupters" of the competition. Joining Apple are Google parent Alphabet, Microsoft, Facebook Inc. and Amazon.com Inc., all with market values approaching or exceeding $500 billion.
The concerted advance of these firms -- each is up at least 17% this year including dividends, and Facebook has risen 47%--is prompting many investors to question whether the biggest tech stocks are "priced for perfection," market shorthand for the idea that at the current price investors are anticipating significant future business gains without discounting likely reversals.
For instance Apple, with a market value of $804 billion, recently accounted for 4% of the market capitalization of the S&P 500. It is a level that only a few firms, including Cisco, Exxon and General Electric, have attained in the past quarter-century or so. It is one that none has maintained for very long.
"It's a club you should never aspire to," said Doug Ramsey, chief investment officer of at Leuthold Group LLC in Minneapolis, with $1.5 billion under management.
Of course, there is no saying Apple won't keep going. Since it began its latest run as the most-valuable S&P 500 stock in May 2016, Apple has added more than $300 billion in market value -- a 62% increase.
It is far from clear that Apple's best days are behind it. The shares this past week posted their largest daily gain since Feb. 1 after the Cupertino, Calif., company said earnings per share for its fiscal third quarter rose 17% from a year ago on a 7% revenue gain.
Analysts continue to expect Apple shares to soar, and why not. The firm's revenue outlook for its fourth quarter was stronger than expected, thanks in part to the coming unveiling of the 10th anniversary iPhone. Despite posting a healthy 14% annual return since 2012, Apple shares still trade at a discount to market earnings multiples.
Even so, the company's market-leading value clearly implies some hefty expectations. With $804 billion in hand, you could purchase the entire S&P Small-Cap index and still have almost $90 billion in walking-around money.
"I think I'd rather own those 600 companies," said Mr. Ramsey at Leuthold.
Write to Colin Barr at Colin.Barr@wsj.com
(END) Dow Jones Newswires
August 05, 2017 02:47 ET (06:47 GMT)