The Market Value Fluctuations of the 10 Largest Companies

Posted on Posted in General Thoughts, Investment Philosophy, Overall Stock Market, Portfolio Management

I thought I’d put up a quick post with an interesting chart that might provide some food for thought. Considering the volatility in the past few days that was created by the surprising results of the “Brexit” referendum where the U.K. voted to leave the European Union, I thought this might be a timely topic to think about. In the past I’ve discussed how sometimes even the largest cap stocks can get mispriced from time to time (see here and here).

I was preparing a slide presentation recently for a friend of mine at Google who is in charge of a value investing club for Google employees (and also the person who organizes the outstanding Investor Talks at Google series). One of the topics I was commenting on was the idea that even large cap stocks can get significantly mispriced from time to time. Some people refer to this concept as “Time Arbitrage”—basically being able to look out 2-3 years when much of the market is focused on the next quarter or two. I think this behavioral concept is the largest advantage that individual investors have—should they choose to capitalize on it.

Large caps might often seem fairly priced (or “efficiently” priced). But taking a look at the fluctuations of the past year (which saw a 10%+ correction, but one that is not at all uncommon by historical standards), it is clear that there are potential opportunities that are served up by Mr. Market among even the biggest of all mega-caps.

It is interesting to note that as I updated this chart from the one I used in my presentation just two months ago, the top company on the list has seen its market cap decrease by roughly $100 billion and three other companies have seen their market values fluctuate by $30 billion or more—all in just two months.

Here is a chart of the top 10 largest companies in the S&P 500, and the percentage change as measured by its 52 week high vs. its 52 week low:

52 week fluctuations June 2016

So the average gap between the yearly high and low price is nearly 50% for these ten mega-cap companies, or an average yearly change in market value of $130 billion. Pretty remarkable.

8 of the top 10 companies saw their market values fluctuate by $100 billion or more. Many of these businesses have very stable earning power with mature, slow-changing business models. It is remarkable to me that a company like Johnson and Johnson can see a $100 billion fluctuation in value between its 52 week high and its 52 week low. Of course, these fluctuations are often correspond very closely to the fluctuations in the overall market, but the fact is that there is almost no chance that a company like JNJ is worth $225 billion in one month, and a few months later is worth $325 billion. There isn’t that much that changes in the course of a few months in most companies of this size.

It should be said that this doesn’t mean that one of these two prices represents a big discount to fair value, it just means that if you sift through even the largest index of stocks (the S&P 500), there are bound to be some fantastic bargains from time to time—even in the largest companies in the world.

As I mentioned in the post on Einhorn’s book, I can categorize market inefficiencies that come from two main sources (there are others, but these are the primary two sources in my experience): Disgust and Neglect.

Companies that get neglected (or haven’t been followed in the first place) are where many opportunities come from. These are often the small or micro-cap companies that can be discovered by diligently turning over rocks.

The large cap companies are not neglected by any means, but they can occasionally become just as mispriced through disgust, or pessimism. The ability to adopt a frame of mind that focuses on a longer time frame (and the variables that impact the outcome over such time frame) is what is required to capitalize on this category of mispricing.

There are obviously opportunities in smaller companies that are several magnitudes greater than in large caps, but my general point in displaying the largest companies is really just to demonstrate that even the stocks of the biggest companies can get mispriced by a not-so-insignificant degree at times.


John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.

John also writes about investing at the blog Base Hit Investing, and can be reached at john@sabercapitalmgt.com

8 thoughts on “The Market Value Fluctuations of the 10 Largest Companies

  1. I think it’s a great idea to think about the opportunity in blue chip stocks. It is often that value investors focus on small caps because those are often where the most undervalued companies are. My focus too has mostly been on small caps for the past several years and I can definitely say I had better returns when I was first starting out because my focus was on well-known brands that were relatively cheap. I’ve been holding a few small cap stocks with no catalyst that are trading at 5x or less FCF (or less than 50% of asset value) and waiting for these situations to be uncovered or for management/activists to create a catalyst. Neglect can last longer than disgust in my experience.

    Taking a look at my own portfolio for the past year I’ve noticed that the best performers have been undervalued/special situations in REITs and utilities (probably could be applied to other regulated monopolies). These are fairly low risk investments but can also provided very legitimate returns ($SELF, $HE). I’m beginning to think I should focus mainly/ first on companies within these few industries railroads, utilities, mutual conversions banks/insurance companies, REITs etc. It’s also great on days like today and Friday to have stocks that either go up or stay flat. Hopefully the bank/insurance stocks along with the cheapness of the stocks will cancel out much of the interest rate risk of my portfolio.

  2. Very interesting Chart! Thank you for sharing!

    It’s interesting how little volatility Berkshire produced in the last year – compared with some other quality names like JNJ. I think its Buffett’s quality reporting that attracts quality shareholders.

    Also interesting that XOM did so well despite the Oil crisis while Amazon is jumping form record year to record year (revenue) producing so much volatility.

  3. $10bn seems large, but the market is discounting cash flows to perpetuity. Small changes to starting conditions (i.e. conditions today e.g. Brexit) can have massive impacts on the aggregate outcomes over the long term. Not saying that is what the market is actually doing, but just one way to look at it.

    1. SK I think you are right – but I think that’s still an opportunity. Small changes in discount rate, itself a function of risk free and risk premium which change as interest rates and volatility risk change, make big changes to a perpetuity/DCF valuation. So technically the market is being somewhat efficient when “worry” makes prices drop – but it’s the multiple (or discount rate) that’s often changing and not the cash flows/ operating profit. As a business owner (albeit fractional) one can exploit this efficiency when discount (or PE or other multiple) reverts to the mean while company fundamentals don’t change so much.

  4. This is what Warren Buffett has said:

    “If you look at the typical stock on the NYSE, its high will be, perhaps, for the last 12 months will be 150 percent of its low so they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand. And you can forget about everything else. That is a wonderful game to play in. There’s almost nothing where the game is stacked in your favor like the stock market.”

    … “..And you can forget about everything else..”..

  5. Thanks for the post, John! It truly is remarkable how much the market values of these companies fluctuate over a given year. I’ve read that one of the first things Joel Greenblatt does when he teaches students is pull out a copy of the WSJ and read off the 52-week highs and lows to his students, and explains that while the prices are gyrating from the highs to lows with changes in the billions, the true intrinsic value doesn’t fluctuate as much. In short, the divergence between prices and values create opportunity. I had never heard of the term “time arbitrage” so I learned something new today. Thanks!

    Chris

  6. Your presented chart is quite useful for a quick glance of the top 10 companies’ performance. This will also give a quick idea how the market is generally performing. But I guess we will still need to monitor what’s next after the impacts of BREXIT become more obvious.

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