Wall Street has always been good at telling stories.
Recently, while the "Magnificent 7" in the US stock market is still hot, Wall Street has timely introduced the concept of "GRANOLAS" in European stocks. This concept consists of 11 European stocks - GlaxoSmithKline, Roche, Asma, Nestle, Novartis, Novo Nordisk, L'Oreal, LVMH, AstraZeneca, SAP, and Sanofi. (Take the first letter of each company's name, and share if duplicate)
Although this concept was proposed by Goldman Sachs as early as 2020, the current trend of "turning red" does not seem surprising.
According to Goldman Sachs, the "Eleven Knights" of European stocks account for 60% of all the gains in the past year, even surpassing the "Big Seven" of American stocks. Goldman Sachs analysts emphasized in recent reports that these 11 stocks demonstrate qualities that can thrive in the current cycle, such as robust profit growth, high and stable profit margins, and strong balance sheets.
This has also caused many global investors to have quite a "happy worry": should they invest in the "Big Seven" of US stocks or the "Eleven Knights" of European stocks now?
However, American financial analyst and veteran columnist Mark Hulbert has a different voice on this matter. He believes that in the long run, focusing on a combination of these popular stocks may not be a good choice.
Overvalued
Hulbert pointed out that as these combination labels are created and increasingly mentioned, the only common feature among individual stocks in these specific combinations is that they have already generated astonishing returns. And without exception, this means that the valuations of these stocks are very high, even completely overvalued.
From the figure below, it can be seen that the current situation is the same for both "GRANOLAS" and "Magnificent 7".
Hulbert stated that although overvalued stocks may still become more expensive in the short term, it is almost certain that their average performance will be lower than the market in the long run. The Law of Universal Gravitation (Value Regression Theory) will eventually win, and at that time, you can bet that Wall Street will create a new batch of high performing stocks and give them a resounding name.
Hulbert said, "In the past decade, we have seen the play of this kind of scenario where underperforming stocks are removed from a popular portfolio, and another new portfolio composed of high-performance stocks is emerging. Do you remember FANG? This portfolio was popular for several years, but gradually fell out of favor. Later, it evolved into FAANG, then FAAMG, and now MAMAMAA or the 'Big Seven'."
Thirty years of Hedong and Thirty years of Hexi
Hulbert stated that it is an inherent process in financial markets for popular stocks to continuously exit the ranks of winners in the stock market and be replaced by new winners. The late Austrian economist Joseph Schumpeter referred to this as the "creative destruction" theory - every large-scale innovation eliminates old technologies and production systems, establishes new production systems, and insists that it is an important byproduct of innovation that drives economic development.
Hulbert believes that if the "creative destruction" in the business world continues, the "Big Seven" will eventually become less glamorous, and "GRANOLAS" will become an outdated product. The future leaders will have almost no overlap with today's leaders.
Hulbert listed a study by Research Associates that focused on the performance of the top 10 US market capitalization stocks at the beginning of each decade since the 1980s, and recorded corresponding changes over the next decade. Rob Arnott, founder and chairman of Research Associates, wants to know how many stocks can still remain on the top ten market capitalization lists at the end of each decade.
The result is that since 1980, there have been only two on average. In addition, the average performance of the top 10 market capitalization stocks at the beginning of each decade is significantly lagging behind the market in the following decade.
Taking Netflix as an example, it is one of the original members of the FANG group. According to FactSet data, the annualized return of the stock has lagged behind the S&P 500 index by 3.8 percentage points in the past five years. Similarly, Tesla, one of the members of the "Big Seven", has recently performed very poorly in its stock price. Hulbert bet that it will soon be kicked out of the "Big Seven" - in the past three years, Tesla's performance has lagged behind the S&P 500 index by 15.2 percentage points.
Hulbert concluded that the only way to make money from the popular stock stories on Wall Street is to know in advance which stocks will become popular. If you cannot predict which stocks will be listed in the next special group on Wall Street, then the only way to ensure that you own these stocks is to invest in the entire market, preferably through low-cost large cap index funds.