The five largest stocks in the US (AAPL, MSFT, AMZN, GOOGL, FB) dominated S&P 500 performance in 2020, returning 56.0% over the course of the year on a capweighted basis, while all other US stocks returned 15.0% in aggregate. The concentration of these five stocks in the S&P 500 peaked in August, while smaller cap stocks outpaced these megacap names in the fourth quarter.
The median valuation characteristics of these five stocks, based on Percent to Target characteristics, have held steady since the end of Q3, but still reflects a default valuation level not observed since 2002. We can further examine implied expectations with VE models below. Since the end of 2020, TSLA has passed FB to claim the fifth largest market cap; we have also included insight into TSLA’s valuation characteristics following their recent inclusion and large allocation in the S&P 500.
For each of these stocks, we have simply calculated a rolling four quarter EBITDA Margin that includes nonoperating income to use as our margin forecast. We then solve for the 2021 sales growth implied in each stock as of 12/31 prices, which we can then compare to consensus 2021 growth forecasts. (In the case of TSLA, we used slightly higher EBITDA Margins in 2021 to better align with forecast EPS and adjusted their CAP to 25 years to align with the investor optimism on the stock that has ushered in their rapid appreciation) Based on this, MSFT, AMZN, and TSLA trade at prices that suggest implied expectations in advance of their analyst forecasts. GOOGL and FB trade at implied expectations well below forecasts, and AAPL implied sales are in-line with consensus forecasts in 2021 (but analyst forecasts fall to roughly 4% in 2022, while implied expectations suggest a 16% CAGR through 2025).