“No investor possesses a crystal ball and one of the biggest traps is to assume that what is working now will work for ever, in terms of a company’s financial performance, stock market performance or both,” says Russ Mould, AJ Bell Investment Director.
“This can be shown by looking at how the world’s largest firms by market cap performed following the stock market peaks of 1999 and 2007. By virtue of their market value they will have been the most popular stocks with investors at the time when everything seemed to be going well – and yet anyone buying then would have suffered some serious portfolio pain.
On 31 December 1999, no fewer than 15 of the world’s 25 biggest companies hailed from the technology, media and telecoms sectors. Buying all 25 in the view that what was working then would keep working would have inflicted losses on the investor over one, three, five and ten years, as well as to date.
Buying the only hottest stocks of all – the TMT names – would have made the losses even worse.
In total just nine of the 25 have yielded capital gains for investors since the 1999 peak and only four – Microsoft, Intel, IBM and Oracle – are TMT companies. One – WorldCom – even went spectacularly bust.
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| Share price performance after the 1999 peak* | ||||
Name | Sector | Market cap ($ billion) | 1 year | 3 years | 5 years | 10 years | To date ** |
Microsoft | Technology | 601.0 | (62.8%) | (55.7%) | (54.2%) | (47.8%) | 59.1% |
General Electric | Industrials | 507.2 | (7.1%) | (52.8%) | (29.2%) | (70.7%) | (74.7%) |
NTT DoCoMo | Telecoms | 368.1 | (49.9%) | (72.1%) | (76.0%) | (83.5%) | (64.3%) |
Cisco | Technology | 355.1 | (28.6%) | (75.5%) | (63.9%) | (55.3%) | (20.6%) |
WalMart | Consumer Discretionary | 307.9 | (23.1%) | (26.5%) | (23.6%) | (22.7%) | 25.1% |
Intel | Technology | 275.0 | (27.0%) | (62.2%) | (43.2%) | (50.4%) | 24.6% |
NTT | Telecoms | 271.5 | (53.0%) | (99.8%) | (73.7%) | (79.1%) | (34.7%) |
Alcatel | Technology | 235.7 | 32.7% | (90.8%) | (74.9%) | (94.8%) | (91.9%) |
Nokia | Technology | 219.7 | 1.6% | (66.3%) | (74.2%) | (80.2%) | (90.0%) |
Pfizer | Healthcare | 204.5 | 41.8% | (5.8%) | (17.1%) | (43.9%) | 10.8% |
Deutsche Telekom | Telecoms | 197.3 | (54.6%) | (82.7%) | (76.5%) | (85.4%) | (80.4%) |
BP | Energy | 196.0 | (13.3%) | (31.3%) | (18.4%) | (3.6%) | (18.8%) |
Exxon Mobil | Energy | 195.6 | 8.0% | (13.2%) | 27.3% | 69.4% | 91.4% |
IBM | Technology | 192.5 | (21.2%) | (28.2%) | (8.6%) | 21.3% | 44.0% |
Citigroup | Financial Services | 187.5 | 22.3% | (9.7%) | 23.6% | (91.5%) | (81.9%) |
Toyota Motor | Industrials | 182.1 | (26.3%) | (35.6%) | (15.8%) | (21.6%) | 38.1% |
AIG | Financial Services | 168.2 | (54.1%) | (82.7%) | (74.4%) | (81.4%) | (35.6%) |
Time Warner | Media | 167.4 | 36.7% | (19.7%) | (8.9%) | (97.9%) | (95.6%) |
AT&T | Telecoms | 166.3 | (2.1%) | (44.4%) | (47.1%) | (42.5%) | (26.5%) |
Oracle | Technology | 159.5 | 3.7% | (61.5%) | (51.0%) | (12.5%) | 63.5% |
Home Depot | Consumer Discretionary | 158.2 | (33.5%) | (65.1%) | (37.8%) | (57.9%) | 152.3% |
BT | Telecoms | 158.2 | (62.2%) | (81.6%) | (80.9%) | (87.3%) | (77.5%) |
Merck | Healthcare | 157.1 | 39.3% | (15.7%) | (49.5%) | (42.5%) | (11.2%) |
Vodafone | Telecoms | 153.8 | (20.0%) | (63.1%) | (54.0%) | (53.2%) | (34.6%) |
WorldCom | Telecoms | 150.9 | (73.5%) | (99.7%) | (100.0%) | (100.0%) | (100.0%) |
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AVERAGE |
| (17.0%) | (53.7%) | (44.1%) | (52.6%) | (17.2%) | |
TMT Average |
| (25.3%) | (66.9%) | (59.1%) | (63.2%) | (35.0%) | |
Source: Bloomberg, Thomson Reuters Datastream. *From 31 December 1999. **To 11 April 2018.
“Any investor who similarly piled in to the world’s 25 biggest stocks by market value in summer 2007 came similarly unstuck.
This time, it was energy stocks and financial services firms, especially banks, who dominated the leaderboard, helped by a surge in oil to $147 a barrel and booms in the US housing and global financial markets.
Anyone buying all 25 names at the July 2007 high would have just about got their money back in capital terms, even if only ten of the stocks have since generated a positive return – and only three of those hail from the list of 12 energy and financial stocks which dominated the market cap rankings just over a decade ago.
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| Share price performance after the 2007 peak* | ||||
Name | Sector | Market cap ($ billion) | 1 year | 3 years | 5 years | 10 years | To date ** |
Exxon Mobil | Energy | 519.9 | (11.6%) | (36.7%) | (6.6%) | (12.4%) | (16.5%) |
General Electric | Industrials | 418.8 | (31.2%) | (64.1%) | (51.4%) | (33.8%) | (67.9%) |
Microsoft | Technology | 301.5 | (17.9%) | (19.9%) | (2.7%) | 134.4% | 194.8% |
Petrochina | Energy | 275.1 | (16.5%) | (29.6%) | (19.2%) | (58.8%) | (55.7%) |
Royal Dutch Shell | Energy | 272.2 | (13.7%) | (14.8%) | 10.3% | (0.4%) | 16.1% |
Gazprom | Energy | 272.1 | 1.4% | (46.5%) | (46.5%) | (58.9%) | (51.5%) |
Citigroup | Financial Services | 252.2 | (62.2%) | (92.2%) | (94.8%) | (83.0%) | (86.2%) |
AT&T | Telecoms | 244.5 | (19.0%) | (37.3%) | (10.5%) | (8.9%) | (9.7%) |
BP | Energy | 237.2 | (13.9%) | (35.9%) | (26.6%) | (31.2%) | (16.5%) |
China Mobile | Telecoms | 232.5 | 14.6% | (15.2%) | (3.7%) | (8.9%) | (18.2%) |
Industrial & Commercial Bank Of China | Financial Services | 232.4 | (9.7%) | (22.8%) | (28.8%) | (1.3%) | 14.6% |
Toyota Motor | Industrials | 223.2 | (38.3%) | (58.4%) | (59.9%) | (18.7%) | (9.3%) |
Bank of America | Financial Services | 218.6 | (44.2%) | (72.4%) | (85.3%) | (51.2%) | (38.1%) |
HSBC | Financial Services | 217.8 | (12.4%) | (21.1%) | (30.5%) | (6.5%) | (14.7%) |
Total | Energy | 202.2 | (22.1%) | (38.2%) | (40.0%) | (29.0%) | (20.2%) |
WalMart | Consumer Discretionary | 200.5 | 18.7% | 1.5% | 46.6% | 55.5% | 77.2% |
Chevron | Energy | 199.9 | (7.5%) | (22.6%) | 17.0% | 12.3% | 27.8% |
Procter & Gamble | Consumer Staples | 197.7 | 1.4% | (1.5%) | 3.4% | 40.7% | 24.8% |
EDF | Utilities | 193.9 | (34.0%) | (60.4%) | (77.4%) | (87.1%) | (83.8%) |
BHP Billiton | Basic Materials | 183.3 | 6.7% | 21.2% | 23.1% | (5.6%) | 2.6% |
Cisco | Technology | 181.8 | (29.7%) | (24.1%) | (44.3%) | 6.5% | 42.0% |
Johnson & Johnson | Consumer Discretionary | 180.7 | 8.7% | (4.5%) | 11.4% | 116.7% | 108.8% |
AIG | Financial Services | 180.7 | (64.0%) | (97.5%) | (97.3%) | (94.5%) | (95.4%) |
Vodafone | Telecoms | 176.0 | (6.1%) | (10.7%) | 13.1% | 33.8% | 23.9% |
Pfizer | Healthcare | 175.4 | (26.7%) | (41.1%) | (4.8%) | 34.5% | 43.9% |
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AVERAGE |
| (17.0%) | (17.2%) | (33.8%) | (24.2%) | (6.2%) | |
Energy and financials average |
| (25.3%) | (23.0%) | (44.2%) | (37.3%) | (34.6%) | |
Source: Bloomberg, Thomson Reuters Datastream. *From 19 July 2007. **To 11 April 2018.
“There are four lessons which investors can draw from this data
Do not assume that what is working well now will always work in the future. New rivals, new technologies and simple management incompetence (a change in strategy, a bad acquisition) can quickly unseat even the most successful company.
Do pay attention to a company’s balance sheet and cash flow, and not just its profit and loss account and share price momentum. Those tech firms which managed to survive the TMT bust and even thrive generally had strong balance sheets laden with cash. As a result, Microsoft has been able to reinvent itself and Intel has maintained its technological and scale edge in microprocessor production, for example. The losers included the highly acquisitive and highly-indebted WorldCom, which turned into an accounting fraud, and Alcatel, whose defensive merger with American rival Lucent merely added complexity to an already difficult situation.
Valuation matters. No matter how good the story looks, investors need to make sure that they are paying a reasonable valuation which leaves room for upside but also protects the downside if and when something goes wrong.
Ultimately, it is hard to buy what is popular and do well for any sustained period of time.
“This final lesson is pertinent today. Just as the 1999 list of most valuable companies was packed with TMT firms and the 2007 list was dominated by energy and financial services giants, the current rankings are dominated by technology firms. They represent six of the seven biggest names and ten of the largest 25 in all.
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| Market cap ($ billion) |
Apple | Technology | 844.7 |
Alphabet | Technology | 698.7 |
Amazon.com | Technology | 693.0 |
Microsoft | Technology | 688.3 |
Tencent | Technology | 500.6 |
Berkshire Hathaway | Financial Services | 485.3 |
Alibaba | Technology | 458.2 |
Technology | 444.6 | |
JPMorgan Chase | Financial Services | 368.3 |
Johnson & Johnson | Consumer Staples | 341.9 |
Industrial & Commercial Bank Of China | Financial Services | 328.3 |
Exxon Mobil | Energy | 308.5 |
Bank of America | Financial Services | 300.5 |
Samsung Electronics | Technology | 297.2 |
Royal Dutch Shell | Energy | 265.4 |
China Construction Bank | Financial Services | 260.5 |
Walmart | Consumer Discretionary | 260.0 |
Wells Fargo | Financial Services | 251.0 |
Nestle SA | Consumer Staples | 246.6 |
Visa | Financial Services | 241.1 |
Intel Corp | Technology | 231.5 |
Anheuser-Busch InBev | Consumer Staples | 221.8 |
AT&T | Telecoms | 218.4 |
TMSC | Technology | 217.6 |
Chevron | Energy | 214.1 |
Source: Bloomberg, as of 10 April 2018
“This is not to say the markets, or tech stocks, are about to implode once more. But Facebook’s woes in particular highlight the dangers which face any company’s economic model and therefore investors who willingly chase share price momentum or pay high valuations for stocks without considering the potential dangers.”