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Mega cap stocks seem to have become more than just a bet on growth, but a place to park money in uncertainty. Stocks such as Apple (NASDAQ :), Amazon (NASDAQ :), Microsoft (NASDAQ :), Facebook (NASDAQ 🙂 and Alphabet (NASDAQ 🙂 not only have healthy sales and profit growth profiles, but they also provide a lot of cash flow
Perhaps more importantly, these companies are the dominant force in their respective industry. This means that these businesses can continue to thrive even during a challenging economic period. The idea has led investors to flock to the mega-cap stocks.
It's not just the basics that drive investors to these mega-cap stocks; it is their sheer size. For example, Apple and Microsoft are the two largest stocks in the US by market capitalization. They are also the main components of indexes, including the. It is difficult for the S&P 500 to rise or fall without participating or perhaps even leading the way.
Meanwhile, companies like Amazon are one of the greatest beneficiaries of the current economic period. The pandemic has given a huge boost to e-commerce. The trend was already favorable for Amazon, but due to the coronavirus, Amazon has seen its sales explode in recent years. The company had sales growth of 40% in the second quarter and more than 37% in the third quarter.
Alphabet saw sales decline by about 2% in the second quarter to $ 38.3 billion. However, sales recovered quickly, increasing more than 14% from $ 46.2 billion last year. In comparison, the company was up more than 52% to $ 16.40 a share.
While many companies have struggled to get through this difficult economic time, these mega caps have, for the most part, thrived. While some stocks have greater volatility than most would expect in a safe haven, not all of them do.
Data from Refinitiv shows Alphabet has a 5-year beta of only 1.03, meaning it trades with almost the same degree of volatility as the S&P 500. Meanwhile, Microsoft has a 5-year beta of 0 , 87. So in some of these cases, the volatility profiles are less than you might think.
Stocks like Amazon, Apple and Facebook, however, trade with greater volatility, bringing betas closer to 1.3.
Although it is difficult to compare these stocks to utility or healthcare names, which typically serve as defensive sectors. The only benefit the traditional defensive sectors can offer is the larger dividend payments, which the mega caps lack.
However, it is also worth noting that a significant dividend can add risk in times of economic uncertainty. If a company's profitability weakens enough, it could call into question future dividends. This could be another reason why some of these more traditional sectors are struggling in 2020.
Mega-cap stocks appear to have played a defensive role in 2020, providing investors a haven in turbulent times. Given their performance this year, it appears to have been a bet that paid off.
Micheael Kramer and Mott Capital's clients hold shares in Apple, Google and Microsoft