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Finance

Which 5 Stocks Account for 23% of the S&P 500’s Weighting?

Many analysts and economists are worried that the US economy and stock market are not in sync since the pandemic started earlier this year. While lockdown and social distancing norms pushed many businesses to the verge of bankruptcy, the stock market continued to rally. The S&P 500 index gained more than 55% since hitting its low on 23rd March to reach a fresh all-time high of $3,481.07 on August 26th. On the other hand, the U.S. economy shrank at an annual rate of 33% in the quarter ended June.

This erratic behavior of the benchmark for the broader stock market can be attributed to the pandemic-perfect business model of the companies having highest weightage in the index. The winning tech giants, Apple, Inc. (AAPL), Amazon.com, Inc. (AMZN), Alphabet, Inc. (GOOGL), Microsoft Corporation (MSFT) and Facebook (FB), have a combined weightage of approximately 23.5% in the S&P 500 index.

These companies have gained significant momentum over the past few months as the demand for advanced and user-friendly technology have increased due to the increasing reliance on the digital mode of living, learning and working. Though the United States is slowly recovering from the pandemic, analysts predict the “new normal” to continue for the foreseeable future with no definitive assurance from the vaccine developers.

The momentum for these tech giants is expected to continue with the upcoming 5G boom. Moreover, these companies should benefit from the growth of the global IT industry, which expected to reach $5.2 trillion in 2020 according to a CompTIA report.

Apple, Inc. (AAPL)

AAPL has the highest weighting (7.1%) in the S&P 500 index. Earlier this month, it became the first US-listed company to reach a $2 trillion market capitalization. AAPL was not immune to the effects of the virus, as its prices took a hit in March. As soon as the country went on complete lockdown, AAPL shares tanked near its year-to-date low of $212.61. Since then, it has gained more than 150% to hit its 52-week high in August, as investor confidence was restored when APPL announced its fiscal third quarter results.

AAPL’s net sales rose 10.9% year-over-year to $59.68 billion in the third quarter ending June 2020. Gross margin increased 12.2% year-over-year to $22.68 billion. Operating income rose 13.4% year-over-year to $13.09 billion, while net income rose 12% from the same period last year to $11.25 billion.

AAPL released the iPhone SE in March 2020 as a flagship product at a competitive price, which boosted its sales significantly despite the recession. With the demand for personal computers on the rise, AAPL also rolled out updated versions of its Macbook for a better user experience. It also launched a radio music service called Apple Music Radio on August 18th.

AAPL’s EPS is expected to grow at 12.5% per annum over the next five years. Moreover, AAPL beat the consensus EPS estimates in each of the trailing four quarters, which is impressive.

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How does AAPL stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

A for Industry Rank

A for Overall POWR Rating.

You can’t ask or better. It is also ranked #1 out of 28 stocks in the Technology – Hardware industry.

Amazon.com, Inc. (AMZN)

AMZN’s business model has allowed it to become one of the most successful companies amid the pandemic. This e-commerce giant has a 4.9% weightage in the S&P 500 index, and is the second largest company in the United States with $1.72 trillion market capitalization.

AMZN’s Prime subscription service which provides swift delivery has allowed the company to reach record highs during the pandemic. RiskHedge reporter Stephen McBride has labelled Prime subscription as a “game changer,” which allowed AMZN to reach its $1.74 trillion market valuation from an $18 billion internet retailer.

AMZN launched Project Zero across multiple countries to ensure 100% authentic goods are sold through its website. Initially launched in 2019, AMZN extended it to 7 new countries on August 11th. AMZN recently announced its plans to strategically invest $1.4 billion across the United States to boost its reach across the country. To this end, the company has also revealed plans of opening a new fulfillment and delivery center in Texas.

AMZN spent over $4 billion in the second quarter ending in June 2020 to deal with Covid-19. This allowed the company to ensure safe and speedy delivery of its products across the country, leading to a 40% year-over-year increase in net sales to $88.90 billion. Operating income increased 87% from the year-ago value to $5.80 billion, and net income rose 100% year-over-year to $5.20 billion. AMZN’s operating cash flow of $51.20 billion increased 42% from the same period last year. Also, AMZN invested more than $9 billion in capital projects including fulfillment, transportation and Amazon Web Services (AWS).

Analysts estimate the third quarter ending September 2020 revenues to be in the range of $90-95 billion, indicating a 32% increase year-over-year. The consensus EPS estimate of $7.24 indicates a 71.1% rise from the year-ago value. AMZN hit its 52-week low of $1,626.03 in March, and gained more than 110% since then. The stock hit its 52-week high of $3,451.74 in August.

AMZN’s strong fundamentals and impressive performance is reflected in its POWR Ratings, it has a Strong Buy rating with a grade of A in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the 57-stock Internet industry, it is ranked #1.

Alphabet, Inc. (GOOGL)

The most popular internet services and search-engine giant GOOGL has a 3.34% weightage in the S&P 500 index. Its ecosystem is gaining popularity during these unprecedented times, as people are adjusting to the new work-and-learn-from-home normal. However, GOOGL witnessed a decline in its advertisement revenues, as companies have little incentive to advertise their products during this period. e-Marketer estimates GOOGL’s ad revenues to decline 5.3% year-over-year to $39.58 billion in 2020. As a result, GOOGL’s share of the U.S. digital ad market is expected to fall 220 basis points to 29.4% in 2020.

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However, GOOGL’s cloud services have steadily gained popularity during this time, with Google Meet emerging as a strong contender to Zoom. As this new work-and-learn-from-home norm seems here to stay, GOOGL is expected to gain significantly in the upcoming quarters. The consensus revenue estimate of $42.71 billion for the third quarter ending September 2020 indicates a 5.5% growth year-over-year. The consensus EPS estimate of $11.15 indicates a 10.1% increase from the same period last year.

GOOGL gained more than 60% to hit its 52-week high of $1,652.79. The stock hit its 52-week low of $1008.87 in March. It’s no surprise that GOOGL is rated a Strong Buy in our POWR Ratings system. It has a grade of A for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #3 out of 57 stocks in the Internet industry.

Microsoft Corporation (MSFT)

MSFT is one of the biggest gainers so far in 2020, as the demand for personal computers have skyrocketed across the world. It has a 12x price-to-sales ratio, which is one of the highest among its peers. Price to sales is a ratio that helps determine a stock’s valuation. Its cloud computing services are now more popular than ever, driving its fourth fiscal quarter results.

MSFT’s revenues increased 13% year-over-year to $38 billion in the fiscal fourth quarter that ended in June 2020. Operating income of $13.40 billion increased 8% from the year-ago value. Commercial cloud revenues surpassed $50 billion mark for the first time in 2020, with commercial bookings growing 12% year-over-year.

MSFT has returned over 23% on its capital employed over the past five years, outpacing its peers by a long shot. The total capital employed in the business has also increased 84% during this time. A high ROCE allows MSFT to periodically reinvest a portion of its earnings, catapulting it to a higher growth cycle.

The consensus EPS estimate of $1.54 for the fiscal first quarter ending September 2020 indicates a 11.5% rise from the year-ago value. MSFT has an impressive earnings surprise history as well, as it beat the street EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $35.69 billion indicates an 8% growth year-over-year.

MSFT gained more than 65% since hitting its 52-week low of $132.52 in March. The stock hit its 52-week high of $222.09 in August. MSFT is rated a Strong Buy in our POWR Ratings system, consistent with its impressive performance throughout the first half of 2020. It has a grade of A in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #1 out of 92 stocks in the Software- Application industry.

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Facebook (FB)

FB has a 2.3% weightage in the S&P 500 index and is one of the contributors to the soaring S&P 500 index, despite a shrinking economy. As people are stuck at home for an extended period of time, FB has emerged as a prime-time entertainment source for all age groups. FB’s daily and monthly active users have increased 12% year-over-year to 1.79 billion, and 2.70 billion in the second quarter that ended in June 2020.

FB witnessed a 10% year-over-year increase in its advertising revenues to $18.32 billion in the second quarter. Net revenues increased 11% from the year-ago value to $18.68 billion. FB made several investments during this time, which is expected to bolster its growth. In April 2020, FB invested approximately $5.7 billion in India’s Reliance Jio, which gave the company access to a 1.3-billion user market. As the second largest internet usage market in the world, FB’s partnership with the biggest internet provider in India is expected to be fruitful.

The consensus revenue estimate of $19.69 billion for the third quarter 2020 indicates a 11.5% growth year-over-year. Though the consensus EPS estimate of $1.87 indicates a year-over-year decline, FB beat the street estimates in three out of trailing four quarters, which is impressive.

FB gained more than 120% since hitting its 52-week low of $137.10 in March. The stock hit its 52-week high of $304.67 in August. FB is rated a Strong Buy in our POWR Ratings system. It has  a grade of A in Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also ranked #4 out of 57 stocks in the Internet industry.

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AAPL shares were trading at $502.15 per share on Thursday afternoon, down $3.94 (-0.78%). Year-to-date, AAPL has gained 72.18%, versus a 9.65% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…

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