What Ama­zon’s rise to No. 1 says about the stock mar­ket

The big­gest com­pa­nies are still the most dom­i­nant — but they can still be top­pled

Toronto Star - - SBJ - JA­SON ZWEIG

On Jan. 7, Ama­zon.com Inc. be­came the world’s largest com­pany by mar­ket cap­i­tal­iza­tion. Its rise might make you think to­day’s big­gest tech­nol­ogy com­pa­nies are turn­ing into un­stop­pable jug­ger­nauts of growth, or that turnover at the top is only ac­cel­er­at­ing.

First, con­sider the his­tory of all the com­pa­nies that have ranked No. 1 by mar­ket size. It’s full of sur­prises.

From the be­gin­ning of 1926 through the end of last year, only 10 com­pa­nies have ever ranked No. 1 among all U.S. stocks by mar­ket cap­i­tal­iza­tion. Ama­zon has just be­come the 11th, suc­ceed­ing Mi­crosoft Corp., Ap­ple Inc., Exxon Mo­bil Corp., Gen­eral Elec­tric Co., Wal­mart Inc., Al­tria Group Inc., In­ter­na­tional Busi­ness Ma­chines Corp., DowDuPont Inc., Gen­eral Mo­tors Co. and AT&T Inc. Some, in­clud­ing AT&T and IBM, spent years at the top. Oth­ers, in­clud­ing Al­tria, DuPont and Wal­mart, were No. 1 for less than a month; Wal­mart was the big­gest U.S. stock for only three days in late 2002, ac­cord­ing to the Cen­ter for Re­search in Se­cu­rity Prices, or CRSP, at the Univer­sity of Chi- cago’s Booth School of Busi­ness. How­ever, com­pa­nies have been hold­ing on to the No. 1 po­si­tion by mar­ket value for about as long as they used to.

Hen­drik Bessem­binder and Goeun Choi, fi­nance re­searchers at Ari­zona State Univer­sity, cal­cu­late that the largest com­pany in the U.S. clung to that spot for an av­er­age of 20 months from the late 1920s through the late 1950s—al­though it was nearly al­ways ei­ther AT&T or GM.

From the 1960s through the end of the1990s, the top com­pany held the No. 1 po­si­tion for an av­er­age of 12 months. From 2000 through mid-2018, the av­er­age ten­ure at the top was 15 months.

Over the past month, Ap­ple, Mi­crosoft and Ama­zon, all with mar­ket val­ues of $700 bil­lion or more, have each been No. 1 for sev­eral days at a time.

Still, War­ren Buf­fett’s old­school con­glom­er­ate, Berk­shire Hath­away Inc., hov­ers not far be­hind at nearly $500 bil­lion in mar­ket value.

Talk to any pro­fes­sional stock­picker and you will get an ear­ful of whin­ing about how to­day’s mar­ket is “nar­row” or “con­cen­trated” or “top-heavy,” with the largest stocks ac­count­ing for an un­usu­ally large share of to­tal value. That’s his­tor­i­cal hog­wash. Ama­zon, at less than 3% of the to­tal value of all U.S. stocks, is a min­now along­side the leviathans of the past.

AT&T was 13% of to­tal U.S. stock-mar­ket value back in 1932; Gen­eral Mo­tors, 8% in 1928; IBM, 7% in 1970.

The sin­gle largest stock has made up about 3% of to­tal U.S. mar­ket cap­i­tal­iza­tion for the past 20 years, ac­cord­ing to Sav­ina Ri­zova, co-head of re­search at Di­men­sional Fund Ad­vi­sors, an in­vest­ment firm in Austin, Texas, that man­ages $517 bil­lion. That’s down from the ear­lier av­er­age, since the late1920s, of nearly 6%.

Com­pa­nies tend to be­come the largest by mar­ket value after their stocks have done well. Over the 12 months ended Jan. 7, Ama­zon’s shares out­per­formed the S&P 500, in­clud­ing rein­vested div­i­dends, by about 38 per­cent­age points.

And Ama­zon’s shares jumped after the com­pany be­came the big­gest, as if some in­vestors had taken that as a sign of ap­proval from the mar­ket gods.

Like­wise, the 10 com­pa­nies that pre­ceded Ama­zon tended to be on a hot streak be­fore they be­came the big­gest U.S. stock. Count­ing all the times they reached the No. 1 po­si­tion, they out­per­formed the mar­ket by an av­er­age of 48 per­cent­age points cu­mu­la­tively over the pre­ced­ing five years, based on the avail­able data, ac­cord­ing to CRSP.

The catch: Over the five years after they hit No. 1, they un­der­per­formed the over­all U.S. stock mar­ket by an av­er­age of 6 per­cent­age points.

What if you just bought the largest stock in the month after it be­came No. 1 and held it so long as it re­mained there? You would have earned an av­er­age of 7.3% an­nu­ally from Jan­uary 1926 through Novem­ber 2018, cal­cu­lates Rui Dai of Whar­ton Re­search Data Ser­vices. Over the same pe­riod, the full U.S. stock mar­ket grew at an av­er­age of 9.7% an­nu­ally.

All these fig­ures in­clude rein­vested div­i­dends.

While such num­bers con­firm the con­ven­tional wis­dom about how mar­ket lead­ers are likely to per­form, they come with a caveat. So few com­pa­nies have ever oc­cu­pied the No.1po­si­tion by mar­ket cap­i­tal­iza­tion, of­ten for such short pe­ri­ods, that you can’t draw sta­tis­ti­cally valid con­clu­sions from such a small sam­ple. Ama­zon de­clined to com­ment. In a re­cent in­ter­view at the Eco­nomic Club of Wash­ing­ton, D.C., the com­pany’s founder and chief ex­ec­u­tive, Jeff Be­zos, in­voked the great in­vestor Ben­jamin Gra­ham’s say­ing that in the short run, the stock mar­ket is a vot­ing ma­chine, but in the long run it’s a weigh­ing ma­chine.

“What you need to do,” added Mr. Be­zos, “is to op­er­ate your com­pany in such a way know­ing that it will be weighed one day and just let it be weighed. Never spend any time think­ing about the daily stock price. I don’t.” (This week, Mr. Be­zos and his wife, MacKen­zie, an­nounced they are di­vorc­ing.)

All in all, Ama­zon’s as­cen­dancy is a re­minder not of how new this era is but how old the dom­i­nance by big com­pa­nies is. In some ways, these are the good old days: The top stocks ac­count for less of the to­tal mar­ket, and the gi­ants don’t ap­pear to be much eas­ier—or harder— to top­ple than they used to be.

Ama­zon’s shares jumped after the com­pany be­came the big­gest, as if some in­vestors had taken that as a sign of ap­proval from the mar­ket gods

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.