Apple Stock Should Be Dropped From Magnificent 7. What Should Replace It.

Similar returns are unlikely in 2024. For one thing, this is the first time the seven largest stocks have recorded such returns since at least 1999, suggesting that a return to the mean may be in the offing. Moreover, only once during that time period did the same seven stocks remain the largest in the index for consecutive years. Something has to give.

The Magnificent Seven doesn’t make much sense from a wallet perspective either. They are highly concentrated in just three sectors – information technology, communications services, and consumer discretionary. No financial companies, energy stocks or industrial companies made it into the top seven last year. There’s not a lot of diversification there.

That’s why it’s time to get more of the great seven, one not based on size alone. Our potential list includes the majority of the Big Seven of 2023 — Alphabet, Amazon, Microsoft, and Nvidia — while Apple, Meta, and Tesla fall behind. Berkshire Hathaway
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UnitedHealth Group
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The visa replaces them. The new list maintains the focus on large companies, but diversifies across more industries, adds more defensive exposure, and replaces potential laggards.

Some of the choices were easy. Tesla has had a turbulent couple of years, falling 65% in 2022 before doubling in 2023. However, this recent rally has not been driven by Tesla’s fundamentals. EPS will likely decline by about 25% in 2023, and is expected to remain below the 2022 level this year. However, the stock is trading at a hefty 62 times 2024 estimates. Tesla even lost the crown of the world’s largest electric car maker to China’s BYD in 2023, despite several price cuts on its most popular models.

The decision to divest from Apple wasn’t that difficult either. Although the company is very popular with analysts, it has its own near-term issues. Apple added $1 trillion in market value in 2023 even as it reported revenue declines from the previous year in four straight quarters. The growth in iPhone and Mac computer sales has essentially ended, and there’s little hope that the upcoming Apple Vision Pro mixed reality headset will move the needle. However, shares are trading near a record high, at 28 times expected 2024 earnings.

Meta was more difficult. A big election year and AI improvements to Meta’s ad products could boost revenue growth in 2024, and the company has certainly made strides as it turns away from its disastrous pivot. But a second “efficiency year,” like the one that lifted its stock 194% in 2023, will be a more difficult lift as analysts see cost increases returning. Even CEO Mark Zuckerberg has been selling Meta shares recently. Analysts remain bullish, but with targets only 5% higher than the current Meta price, Alphabet appears to be the better bet. Having both in the wallet seems redundant anyway.

We considered both JPMorgan Chase and Exxon Mobil among our seven most impressive companies. The sports market has a market capitalization of $375 billion, and cheap price/earnings multiples are about 11 times consensus forecasts for 2024. A slowing but still growing economy this year should boost results in both, with ample free cash flow directed toward operations. Buy back. Exxon offers a dividend yield of 3.8% annually, while JPMorgan offers 2.5%. Ultimately, however, there are surer bets for 2024 that can control their destinies better.

Our More Magnificent Seven still benefits heavily from fast-growing technology trends, but adds exposure to other areas of the economy and stock market. It will be difficult to surpass last year’s performance, but a supportive economy and an expanding rally could help some of the market’s largest companies have another successful year.

Microsoft: $2.79 trillion Market value

Microsoft is closing in on Apple in the race to become the largest US company by market capitalization, and for good reason. While Apple struggles to grow, Microsoft is leveraging its leadership in artificial intelligence to fuel its growth. The Azure cloud computing segment is set to grow again in 2024 and could take market share, while 365 Copilot’s generative AI assistant could add $10 billion in annual subscription revenue within two years, according to several analyst estimates. At 31.5 times 12-month forward earnings, Microsoft isn’t cheap, but if AI grows the way the Street expects, that may not matter.

Alphabet: $1.77 trillion

There are legitimate concerns about Alphabet, especially after its big gains last year. No one knows how generative AI will impact Google Search, and the company’s Bard chatbot lags behind competitor ChatGPT. But there’s something to like about it. At 20 times 2024 earnings estimates, Alphabet, along with Meta, is the cheapest of the Magnificent Seven for 2023. Heavy political advertising ahead of the 2024 election could boost search and YouTube, while Google Cloud’s growth is expected to accelerate again. Alphabet still has plenty of cost-cutting to do in its other betting business, more than $100 billion in net cash, and the ability to buy back shares this year. We imagine it will discover artificial intelligence as well.

Amazon.com: $1.56 trillion

Amazon is among the most popular sell-side stocks, with 98% of the 59 analysts covering it giving it a buy rating or equivalent, according to FactSet. why not? A still-strong consumer market in 2024 will boost the e-commerce side of the business, while new cloud-based AI-as-a-Service revenue will help performance in AWS, Amazon’s cloud business. Earnings per share are expected to jump 36% and free cash flow to boom 66% in 2024. At 41 times expected earnings, Amazon shares aren’t cheap in absolute terms, but the shares are the cheapest they’ve been in more than a decade.

Nvidia: $1.31 trillion

Nvidia’s results speak for themselves: Revenue is on track to more than double in the current fiscal year, which ends in January, driven by demand far exceeding supply for its graphics processing units. The next fiscal year won’t be slow either, with analysts forecasting 57% and 69% growth in revenue and earnings per share, respectively. Don’t ignore the software development ecosystem, known as CUDA, which should help the company maintain its dominance. Yes, Nvidia has been the biggest beneficiary of the AI ​​boom, but even after the stock’s massive rise, its stock price, at 26.8 times earnings, still looks reasonable. Maintaining exposure to Nvidia seems like a no-brainer.

Berkshire Hathaway: $799 billion

Berkshire Hathaway is a market-cap giant, making it a good, diversified addition to the 7 Most Fascinating Companies of 2024. The Warren Buffett-led conglomerate adds some exposure to industry and utilities, along with its sprawling insurance operations. It maintains exposure to Apple, Berkshire’s largest stock holding, if the iPhone maker has a strong year anyway. The bull case for 2024 is a continued insurance turnaround and rising operating profits elsewhere in the portfolio. The roughly $150 billion in cash on Berkshire’s balance sheet gives Buffett ammunition for a potential deal or stock buyback, as the stock price looks reasonable at 19 times earnings. It was last in the top seven in 2022.

Visa: $529 billion

Visa prides itself on a strong business with a wide competitive moat, economies of scale and huge profit margins. The payment processor is expected to grow as it always does in 2024 and beyond — 10% on the top line and 13% to 15% for EPS. Processing more payment volume across the Visa network will cost you no extra money – virtually every marginal swipe of your credit or debit card represents profit. Visa shares trade at less than 26 times its expected 2024 earnings, versus its average of 30 times over the past five years, and the growth and defensive attributes add to the “magnificent seven,” helping in what could be a more volatile 2024.

UnitedHealth Group: $498 billion

No matter what the economy does, people still need to pay their premiums, take their medications, and see the doctor — a defensive exposure that could be wise in 2024. UnitedHealth, which was one of the seven largest stocks in the S&P 500 in 2022, has industry-leading scale in commercial and Medicare Advantage plans, as well as care delivery through OptumHealth and pharmacy benefits manager OptumRx. Analysts expect medical cost growth to slow in 2024, and UnitedHealth management has already provided guidance for earnings per share growth of 12% this year. After gaining less than 1% in 2023, it still has some catching up to do.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com