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Concentration of Top 5 Market Cap Stocks in S&P 500 (Update Jan. 2021)

January 19, 2021 Applied Finance

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. We can further examine implied expectations with VE models to the right. 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. […more]

Looking Backward and Forward – Q4 2020 Review

January 11, 2021 Applied Finance

Incorporating the latest 10 Yr US Treasury yield into our market derived discount rate calculation, the Equity Risk Premium (ERP) per our estimates, is currently at ~6.8% for nonfinancial US firms in nominal terms, significantly higher than the historical median and average of ~4.5%. With the risk free rate historically low, equity investors seem to be demanding a fair amount of protection, though the market appears overvalued despite the high ERP. […more]

The Roaring 2020’s

December 11, 2020 John Holt, CFA

The 1999 Tech Bubble was an extraordinary period. “Fundamentals don’t matter” “It’s a tech company, not a manufacturer” “Past a certain point of profitability, there’s zero chance the call options tank back to worthless” However, […more]

Demystifying the False Choice of Value and Growth Investing

November 19, 2020 Derek Bergen, CFA

Many investors have chosen sides in the partisan “value vs. growth” debate to define their investment ideology and market their products. Instead of choosing sides in this arbitrary debate, since 1995, Applied Finance has advocated for a robust valuation-centric philosophy emphasizing economic principles centered around profitability, growth, competition, and risk. Equipped with this point of view, it is clear that value and growth managers are both aware of important considerations when estimating intrinsic value, but staunch advocates of either perspective suffer from incomplete frameworks. Value advocates are correct that valuation should matter, but commonly used methodologies suffer from poor ex-post performance and lack a robust economic justification, especially when a dividend discount model tautology assumes that negative growth unconditionally generates positive stock market returns. Growth managers are correct that positive growth potentially creates shareholder value, but absent a reliable corporate performance and valuation framework, they too often lack the ability to understand the required future growth and profitability expectations embedded in stock prices. […more]

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