The Magnificent Seven stocks carried the markets in 2023, far outperforming most of the rest. These seven stocks — Nvidia, Microsoft, Apple, Amazon, Alphabet, Tesla, and Meta — returned an average of 111% last year, compared to a roughly 25% return for the S&P 500 and a 54% return for the Nasdaq 100.
They accounted for 29% of the market cap of the S&P 500, the largest concentration they have ever had, as Forbes Contributor David Thomas pointed out in an article published in January. Take out the Magnificent Seven, and the S&P 500 would have had an average return of about 8% last year, as some 72% of its stocks underperformed the index.
Year-to-date in 2024, the Magnificent Seven stocks are up about 13%, on average, which doubles up the approximately 6.5% return for the S&P 500, but a closer look at the performance of the seven stocks shows a mixed bag. Nvidia (+65%), Meta (+39%), Amazon (+17%), and Microsoft (+10%) are all up YTD as of Feb. 26, but Tesla (-20%), Apple (-2%), and Alphabet (+1%) are either down or roughly flat for the year.
While these seven stocks form the backbone of many large-cap hedge fund portfolios, managers were making moves relative to their Magnificent Seven holdings in the fourth quarter – with some dialing things back, and others adding new positions. Here is a snapshot of some of them.
Betting against some of the Sevens
The sizzling performance of the Magnificent Seven started slowing down in Q4, performing roughly in line with the larger market, as opposed to the huge outperformance through the first three quarters. In fact, the Russell 2000 beat the S&P 500 in the fourth quarter and many experts, including analysts at Goldman Sachs, expect that to continue in 2024. Goldman Sachs projected a 15% return for the Russell 2000 and about a 7% return for the large-cap S&P 500 this year. So far, the S&P 500 is up about 6.5% but the Russell 2000 is roughly flat year-to-date.
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NZS Capital, which runs the NZS Growth Equity Fund, made some moves in the fourth quarter to prepare for what it expects to be a broader market in 2024. Part of their strategy was to sell its stake in one of the Magnificent Seven stocks.
“We sold Amazon, which had been a large position, to focus on more favorable stocks with similar opportunities. Shopify can thrive in e-commerce while Microsoft’s cloud offering is encroaching on Amazon’s opportunity,” the portfolio management team wrote in the Q4 investment commentary.
With the selling off of Amazon, the fund, which returned 35% in 2023, does not hold three of the Magnificent Seven — Meta, Amazon, and Apple – and is underweight in Nvidia and Tesla, “where we think smaller positions reflect the wide range of outcomes, including some disappointing scenarios.”
Bireme Capital, which runs the Bireme Fundamental Value Fund, has made several moves relative to their Magnificent Seven holdings, citing, among other reasons, their high valuations.
“Yet within just a few short quarters, we find that the massive gap between intrinsic value and market price has been mostly realized. We have sold our Netflix position, and significantly pared our Meta position. We remain short Tesla – a car company with car company margins, having an increasingly difficult time masquerading as a tech company with tech company margins – and have added a short position in Apple – a low-growth company trading at a high-growth valuation,” Bireme managers wrote in the December letter to investors.
On Apple, which comprises approximately 7.4% of the total value of the S&P 500, they said the valuation was too high for a business with a substantial cyclical component and a projected revenue growth rate of 4% between 2022 and 2026. They are betting that Apple stock will return less than the market, and its long positions, over the next several years.
ClearBridge Investments Dividend Strategy Fund, which reduced its position in Apple last year, had a similar take on its slowing growth. In their Q4 portfolio manager commentary, the managers said that Apple will need a “meaningful acceleration in revenues” to sustain its valuation and “we do not see any obvious catalysts.”
Adding positions in Microsoft, and others
Along with these defensive moves, some managers saw opportunities to add positions to their Magnificent Seven holdings in the last quarter. The Baron Fifth Avenue Growth Fund, managed by Alex Umansky, added Microsoft last quarter, due, in part, to its strength in cloud computing and generative artificial intelligence (GenAI).
“Over time, Microsoft was able to build a $125 billion run-rate cloud business that is still growing at a rapid pace and continues to take market share, while becoming a more important driver for the company. For example, in the last quarterly earnings release, Microsoft Cloud grew 23% year-over-year in constant currency, significantly outpacing the company’s 12% overall constant currency growth as well as the growth of its main competitors,” Umansky wrote in a fourth quarter letter to shareholders.
He also said AI and GenAI represent “potentially the biggest addressable market expansion for the company in recent history,” advantaged because it does not face an “innovators’ dilemma in its core business” like some competitors.
The Polen Focus Growth Fund added to its position in Microsoft, according to its December portfolio manager commentary. The Polen Focus Growth team pointed not only to the growth potential of GenAI for its cloud business, but also for its productivity suite of products.
Also, the Mairs & Power Growth Fund, managed by Andrew Adams and Pete Johnson, initiated a position in Apple last quarter. In their Q4 commentary, the managers cited Apple’s dominance among Millennials and Gen Zers, which should lead to greater market share as these generations age. In addition, they said they plan to add to the position at a more attractive entry point down the road. The stock is down so far this year, so maybe that point has arrived.
Finally, the Polen Global Growth Fund added to its Amazon position in the last quarter, citing an expected re-acceleration of growth in its AWS cloud business and margin expansion in the e-commerce segment.
“Further, Amazon’s e-commerce business has gradually re-accelerated from 2022’s levels and, perhaps most importantly, the company’s margins and free cash flow have rebounded materially from last year. This rebound in margins and free cash flow at Amazon has been a key component of our long-term thesis for the business,” the portfolio managers wrote in their December 2023 commentary. They see these metrics improving as the company “continues to optimize costs and capital expenditures.”
As mentioned, this is just a sample of some of the moves related to Magnificent Seven stocks, and perhaps a reminder that investors should also review their positions in them after such a successful 2023 when prices surged.
