The top 10 stocks in the S&P 500 now account for more than 1/3rd of the value of the S&P 500.  Valuations in this group are vastly elevated compared to their historical levels, highlighted by Nvidia trading at a staggering 41 times sales.  It’s hard not to compare today’s environment in the large cap Technology space, to the Tech Bubble that burst in 2000.  The WSJ had a great article on this, where I highlighted a few of the more salient paragraphs.


“A basket of 43 high-multiple internet stocks–those worth at least $5B that traded at 25 times their revenue at the turn of the century–crashed 80% over the next two years, according to Sparkline.


The companies weren’t duds, either.  Their sales grew 10-fold in the ensuing two decades.  But investors were badly bruised from the bust: The shares returned an average of 16% in that time span. The S&P returned 284%.”


Valuations matter in investing.  We saw what happened in late 2021 and 2022 what happens when a bubble pops, but realistically that was mild compared to what we saw in 2000, or in 2008.  I don’t think the whole market is trading in a bubble, as there are many sectors that offer fantastic value.  I’ve rarely seen high quality companies offering such high dividend yields and low earnings multiples.  These opportunities just aren’t in the glamour areas that capture all the headlines.  We’ve been buying incredibly well-financed real estate companies with yields from 5-9% that are still growing.  These companies are in attractive sectors in the market with high occupancy levels and strong demand.  When rates do start coming down again, we believe these companies can rally by 50%, but in the meantime, we get paid to wait.  


Energy, utilities, financials and healthcare are all pretty cheap relative to the market and history.  As I keep writing about, the opportunity in fixed income is as good as we have had in many decades.  We are buying very attractive bonds at yields between 6% and 12% currently, as spreads have come down a bit. These bonds provide fantastic diversification and should hold up much better in time of stock market turmoil.  If we do fall into a recession, you’d likely see rates come down, which would be really beneficial for our bonds, but a missed opportunity for those that don’t invest.  If you have extra capital sitting around not earning much, it’s a great time to deploy and capture these yields.  Here is the article I referenced and if you need anything or have any questions, please don’t hesitate to contact me.  


Podcast Video