August 2023

To Our Business Partners


Concentration. The popular S&P 500 index is a flawed stock market benchmark due to the dominance of only a few mega-sized stocks.  Only 7 companies* now make up nearly ONE-THIRD of the S&P 500, while 31 companies comprise OVER 50% of the index. Most stunningly, the top 10 largest companies by market value accounted for ALL the index’s gains in the first six months of this year.  The other 490 combined companies were DOWN in value.  Similarly, in the NASDAQ 100 index of the NASDAQ’s largest companies, these same 7 companies now make up 50% of that index.

These “growth” companies have risen sharply in value despite anemic, at best, recent growth in their earnings.  The extreme concentration has never been healthy for the stock market in general.  We’re old enough to remember similar conditions in 1972 and 1999.  In both cases, the small groups of market favorites’ prices declined considerably in subsequent years.  Most notably, the technology-stock-heavy NASDAQ index suffered a decline of nearly 80% from early 2000 to late 2002.  The biggest component at the time, Cisco Systems, dropped 85%.  Watch out, Apple (?).

Valuation #1 – Individual Stocks. This concentration is also very expensive.  The 7 heavyweights* trade at an average stock-price-to-earnings ratio of roughly 35-to-1. That’s historically unsustainably high.  Looking at it in a different way, for every dollar of stock price you pay, you get 2.9 cents in earnings.  The earnings of these companies would have to grow at a phenomenal rate to recover your initial purchase price.  Additionally, the “earnings yield” of 2.9 (percent) in a risky long-term security is well below the 5.50% yield obtainable on a risk-free 3-month U.S. Treasury Bill.

Valuation #2 – “The Market.” Based on several valuation measures, the stock market is very close to its most expensive level in history.  We continue to believe strongly that future returns for the stock markets will be below their historical averages.  The relationship between valuations and subsequent returns is well established.  Whether your income producing asset is a stock, bond, private business, apartment building, or machine, when you pay too high a price for the asset, your income stream will always produce a low future return on investment.  Patience and careful qualitative and quantitative selection are required.

*The “magnificent 7”:  Apple, Alphabet (Google), Amazon, Meta Platforms (Facebook), Microsoft, Nvidia, and Tesla.  Apple leads the pack with a market capitalization of almost $3 TRILLION. (Astonishingly, there are only six COUNTRIES in the world whose economic value is greater than $3 trillion!)


We’re waiting patiently to acquire individual stocks at large discounts to estimated values.  While our group of widely-held stocks* is priced at a high 90% of value, there are several companies that meet our criteria for growth, financial soundness, profitability, management, and PRICE, that we’re buying today.


Stock market indexes were all up in July, ranging from 3-6%, with the smaller company indexes registering the best gains. All the indexes are also up for the year to date, albeit with wildly different results.  The DJIA has gained about 7% year to date, while the NASDAQ Composite is up about 37%. Over the last 12 months, gains are still widely scattered with the S&P 500 and NASDAQ leading the way, up 11% and 16%, respectively.  The remaining indexes registered gains of 3-9%.  With all the attention focused on the big recovery in the NASDAQ so far this year, an overlooked fact is that it is still DOWN over 8% since the end of 2021.  In fact, all the indexes we monitor are down from 2-11%.  By contrast, our group* of portfolio stocks has produced positive returns over that 18-month period.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.