Only Invest In Mega-Cap Stocks If You Think Stock Repurchases Are Worth It

by: George Kesarios


The data shows that mega cap stocks over a long period of time simply get cheaper and underperform.

The reason for this is probably their large market cap, that requires extraordinary amounts of money to move, as opposed to smaller cap stocks.

As such, if you decide to buy a mega cap stock, make sure dividends and stock repurchases are sufficient for the stock to gain in value.

Otherwise even if the company is doing great, chances are the stock will go nowhere.

I love Apple (NASDAQ:AAPL), I really do. I love the iPhone, my MacBook and everything that has to do with Apple. Hey, my first computer was a Macintosh with 1 Meg of RAM back in 1986.

There is nothing that I can find wrong with Apple. Its management, the people, the way it works, thinks and executes. And that's the reason why it is the largest market cap company in the world.

However, Apple from now on is on my blacklist as far as investments are concerned.

Why do I think Apple is a bad investment?

According to data from the World Bank, current Global GDP stands at around $77 trillion. Apple's current market cap is about $562 billion. So Apple alone is worth about 0.72% of world GDP.

Is that a lot? Yes it is. And the reason in my mind why it is important, is because it takes a lot more money to move a stock worth $600 billion, than a stock worth $10 billion.

So my question is, is there a relationship between a stock's market cap and global GDP? Or even better, a relationship between market cap and the GDP of a country? I do not have clear cut answer to that, however the data I will show you testifies to that there is some sort of relationship.

Let me show you some charts.

AAPL Market Cap Chart

As you can see from the chart above, Apple's market cap, on average, has been about the same since 2013.

At the same time however, its revenue has been growing. And if one looks at its PE ratio, it is falling. In other words, market cap has not been following the fact that Apple is doing so great as a company.

No matter how much better Apple does, the market is not rewarding the stock with a higher (on average) valuation. So the stock just keeps getting cheaper and cheaper, as evidenced by a lower P/E ratio.

This disconnect between Apple's performance and valuation, leads me to suspect it has something with Apple's mega market cap status. And the reason is simple, it takes a lot more money to move Apple than a small cap stock.

And the money available to move Apple is a function of the money invested in the market, and GDP (either U.S. GDP or world GDP, since Apple is such a global company).

Which leads me to another theory. Is there a market point and beyond - market cap-wise - where no matter how great a company does, it will underperform?

I don't know exactly, but the data I have been looking at recently suggests there is such a point. And if so, should investors who want more than a dividend disregard stocks like Apple totally from their portfolios?

(Are there any finance graduate students out there who want to investigate this? Guys I am giving you a hell of a thesis here).

And Apple is not the only example folks, there are plenty of stocks that have been underperforming for years and years that belong to the mega market cap category.

INTC Market Cap Chart

CSCO Market Cap Chart

See it's not only Apple, Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC), among others, share many similar characteristics with Apple. And that is, while revenue has been going up for many years now, the market cap has not followed, and the stock just keep getting cheaper as evidenced by the falling P/E over the long term (on average).

In fact even though Microsoft (NASDAQ:MSFT) has become more expensive recently (as evidenced by its P/E ratio of 35), over the very long term it also had a stagnant market cap (and has underperformed for the longest time). To date Microsoft's market cap is still lower than what it was in 2000.

MSFT Market Cap Chart

Don't despair, there are reasons to buy the above stocks

All the above stocks are not my cup of tea, and I would not buy them as long-term investments at this point (for trading purposes is another story). However everyone is not like me.

Even if evidence points to that there is some relationship between a company's fundamentals performance and a stagnant market cap (over the long term), there are still reasons to by the above stocks. And those reasons are depicted in the chart below.

MSFT Average Diluted Shares Outstanding (Quarterly) Chart

There are only two reasons in my mind to buy any of the stocks mentioned above for long-term purposes. The first is the dividend, and the second a shrinking float. In other words, how fast the total number of shares are being reduced via stock repurchases.

Unless repurchases are large enough in order for the stock to gain in value over the long term, chances are that a mega cap stock will go nowhere for years and years. But if the dividend satisfies you, then there is no problem, because that's probably all you are going to get.

Bottom line

While there is no rule that says mega cap stocks underperform, anecdotal evidence suggests that over the long term, they do.

While Apple's average price target by analysts is at $142, I doubt the market cap of Apple will increase by much. If Apple reaches that target, it will be because of stock repurchases and nothing else.

One other thing, when buying mega cap stocks, make sure the money returned to shareholders via dividends and stock repurchases (preferably the second if you ask me), is enough for the stock to able to gain in value over the long run, otherwise even if the company is doing great, chances are the stock will go nowhere.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.