Instability At The Top

by: Dorsey Wright Money Management

By Andy Hyer

It requires a huge run of success to make it into the list of the top 5 stocks based on market capitalization, but how durable is the performance of those mega caps after they make it to the top? Justin Fox at Bloomberg took a look at this question.

Consider the following two charts. The first chart shows today's top 5 market-cap stocks (Alphabet/Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), and Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)) and the trajectory they took to get there.

The second chart looks at the top 5 market cap stocks from a decade ago (Exxon Mobil (NYSE:XOM), General Electric (NYSE:GE), Microsoft, BP, and Citigroup (NYSE:C)), and how they have fared since.

Only Microsoft remains in both lists. In fact, Microsoft was the only one of those stocks that beat the S&P 500 over the past decade. Two of the stocks are still well underwater from where they were a decade ago.

Source: Yahoo! Finance. Returns are inclusive of dividends, but do not include any transaction costs. 2/2/06 - 2/2/16

Admittedly, this is not a comprehensive study. Rather, it simply illustrates the fact that success is not guaranteed. Just because a company has been successful in the past does not guarantee that it will be successful in the future.

As we commonly point out, there is no shortage of data showing the rationale for buying high momentum stocks. Sometimes those high momentum stocks are also mega-cap stocks. However, having a good sell discipline is essential!