As the mega-cap tech rally takes a breather, speculation is rife about the candidates that could potentially be the next “Magnificent Seven.” Renowned investor, Josh Brown of Ritholtz Wealth Management, has delved into the abyss of stock screening to pen down seven noteworthy ticks that he terms the “Mag 7 Bench.”
Insightful Metrics: Brown, in a recent installment of the “The Compound & Friends” podcast, sheds light on the criteria applied in spawning this list. Factors such as market capitalization, relative strength, price-to-earnings ratios, and revenue growth were pivotal in the assembly process.
All entities on this coveted list boast market caps under $350 billion, relative strengths hovering between 45 to 65 over a 14-day period, forward price-to-earnings ratios capping at 85, and five-year annualized growth rates of 25% or higher.
Brown, reflecting on the rationale behind the 25%+ five-year annualized growth rate prerequisite, notes that this stringent threshold had effectively sieved out other contenders. This criterion ultimately condensed the universe of potential candidates into a succinct list of nine stocks, from which the “Mag 7 Bench” was curated.
Here is a glimpse into the “Mag 7 Bench” concocted by Brown and his team:
- Advanced Micro Devices Inc (NASDAQ: AMD)
- Uber Technologies Inc (NYSE: UBER)
- CrowdStrike Holdings Inc (NASDAQ: CRWD)
- Palantir Technologies Inc (NYSE: PLTR)
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Strategic Implications: Brown, while acknowledging the imperfections of this list, accentuates the value it brings to the table in terms of contemplation and forecast. “This list should ideally serve as a springboard for further analysis,” he suggests.
Elaborating on his approach, Brown advocates for a closer examination of the business verticals these companies operate in. He encourages investors to ponder whether the core operations have the potential to burgeon into trillion-dollar market caps over time.
Using Uber as an exemplar, Brown posits that activities involving transportation and logistics could conceivably propel the company towards stratospheric valuations exceeding $1 trillion in the near future.
“Expanding on the total addressable market (TAM) could plausibly justify a market capitalization akin to the magnitude of the ‘Magnificent Seven.’ This exercise is paramount for investors seeking growth prospects,” Brown iterates.
Reflecting on historical precedents, Brown emphasizes that a similar stock screening exercise undertaken five years ago would have bypassed some of the current Magnificent Seven constituents. Moreover, even if the identical screening criteria were applied but with a lowered five-year annualized growth rate threshold of 20%, both Apple and Microsoft would have evaded the initial selection round, Brown highlights.
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