The “Market History” Trap
For a very long time, market commentators have been jabbering (and worrying) about the concentration of value in the S&P 500 by a few large companies. They worry because this is a sign of an “unhealthy market,” according to market history.
But does it make sense to compare the companies at the top of the index today with those in the past? We don’t think so.
Below are the top 10 companies in the index in 1990. The list was dominated by Energy, Consumer Goods, Drugs, and one technology company—IBM. Remember, most of the computing power was housed in mainframe computers, personal computers were less than 10 years old, and the Internet was still 5 years away. Back then a great business earned 15 cents on every sales dollar.
Below is what the list looked like at the end of 2023. Even though they are grouped in three different sectors, the top six companies are all thought of as Technology businesses. They are major beneficiaries of the Internet and software. Unlike 1990, most of the computing power today can be found in smartphones, many employees are working from home, and the early versions of Artificial Intelligence have just been released. The businesses below are the best ever created and earn between 25 and 50 cents on every dollar of sales.
Software has allowed worker productivity to expand enormously, and the Internet has allowed for free distribution of services nearly worldwide. None of that was possible in 1990 and profit margins and other measures of business quality prove that these companies are massively better businesses than those of 24 years ago.
We believe that many, if not all, of the largest companies in the index today are under-valued when compared to the earning power they currently exhibit. And they are even more under-valued when their potential growth in earning power is factored in. These companies, while very large, still have much to accomplish before reaching their full potential.
This is different. And while these companies are very familiar to Dock Street clients, it is important to remember that those we own have been in client portfolios for an average of 10 years.
Our job is to find other businesses with similar potential while closely watching those we already own.
Best regards,
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and/or our clients may own the companies discussed in this letter. This article is not intended to be used as investment advice.
Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.
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