The so-called “Magnificent 7” represent a diverse group of U.S.-based technology companies that receive the lion’s share of attention from most investors right now. Whether you’re a growth investor, or a passive investor using index funds, these are the stocks that matter when considering which stocks to buy and sell. Indeed, the majority of the returns seen in most indices can be attributable to these seven stocks.
Taking the entire group together, more than 29% of the S&P 500’s performance can be traced back to these seven stocks. The fact that 493 contribute the other 70% or so of the market’s performance is very telling.
Investors who have taken a mega-cap approach to the market have done very well over the past few years. But that’s not guaranteed to continue.
Accordingly, for those looking to make a pair trade right now (go long names that may outperform, and short those that are likely to underperform), here would be my one buy and two bails.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) has to be my one buy. Everyone else is doing it, so it must be the place to invest, right?
Well, I think there’s actually something to that thesis. For the longest time, I’ve been stuck on the company’s valuation as an indication the market is frothy and probably pricing in too much growth in this name. The thing is, Nvidia’s incredible earnings results each quarter continue to dwarf the market’s expectations. The result has been a skyrocketing stock price, but a valuation multiple that’s actually come down from where it was just a few years ago.
This kind of growth is mind-boggling, but it appears likely to remain in place. The rapid adoption we’re seeing from companies of all stripes looking to pivot toward AI-based business models is astounding. Until this pace of demand slows, I see no reason why Nvidia’s potential is capped.
So, for now, I think it’s simply too dangerous to be out of Nvidia. The stock trades at 76 times earnings, which may seem expensive. But with a company that’s proven to grow at a triple-digit rate, it’s cheap on a price-earnings-to-growth basis. I thought I’d never say that, but that’s where we are.
Tesla (TSLA)
Now this can be sad for EV fans, but Tesla (NASDAQ:TSLA) is lagging behind in the Magnificent 7 list. In fact, its performance is down 30% so far in 2024, and this is due to tight competition with Chinese EVs. Despite aiming for high sales, hurdles persist, potentially impacting its position in the market.
Tesla’s current board chair Robyn Denholm encouraged shareholders to agree on Elon Musk’s $56 billion pay package, which was approved with 72% of the shareholder vote last week. The approval helps Musk retain his position in the company. Shareholders successfully voted in favor of this package being passed, though it’s unclear if Musk’s move to Texas will hold up in the court system or if the Delaware Court of Chancery will take it from here.
Either way, I expect some ongoing debate and legalese to take hold in the coming months. For now, Tesla stock is up on the news. However, the company’s fundamentals remain impaired, with price cuts impacting margins and the company losing money on most major metrics.
Tesla’s fundamental bull thesis may be broken without a major boost to earnings via subsidies (which has been the case in the past). It’s a growth stock that just isn’t growing (very fast) at all.
Apple (AAPL)
Apple (NASDAQ:AAPL) has always been silent about AI in its products, but that all changed in 2022 when generative AI changed the landscape. The shift made the smartphone company integrate AI into its products, and it contributed a lot of cool features for Apple users. At Apple’s WWDC, CEO Tim Cook hinted at significant AI features, signaling a departure from their secretive approach.
Apple is dedicated to empowering app creators worldwide, offering various online and offline programs for guidance and innovation. In 2023, it reached developers from 160 countries and expanded support with updated forums and pathways. Susan Prescott, Apple’s vice president of Worldwide Developer Relations, expressed pride in supporting developers’ journeys and fostering innovation.
According to open data, over $1 billion iPhones are in use worldwide, and investors are excited to hear about new AI features to compete with Android. Companies with other AI strategies also saw stock gains, and Apple is also seeing that.
That said, this stock does look pricey relative to its near-term growth potential. While I think Apple is likely still a long-term hold (and I’m bullish on the company over a longer-term time horizon), I also think this is the Magnificent 7 stock that could have the most downside in a recession. So, for those who are risk-averse, I’d caution you about betting on this name right now, particularly seeing how far it’s run in such a short time.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.