April 17, 2012

S&P’s Stovall: Don’t Get Mad, Get Even With Apple

Investors are angered by the market’s vulnerability to a Newtonian event: Apple falling to the ground

Apple's headquarters in Cupertino, Calif. (Photo: AP) Apple's headquarters in Cupertino, Calif. (Photo: AP)

AdvisorOne contributor Sam Stovall, Standard and Poors’ chief equity strategist, compares investors to Jan Brady in his latest commentary, claiming they’re "frustratingly chanting Apple, Apple, Apple.”

“Shares of Apple rose nearly 50% year to date through April 13, helping the S&P 500 Index advance by 9%, versus the YTD gain of 7.5% for the S&P Small Cap 600,” Stovall explains. “What’s more, Apple recently eclipsed the $600 billion capitalization mark, if only temporarily, and is now the largest stock in the S&P 500, representing 4.56% of the index. It, along with two other tech behemoths, International Business Machines and Microsoft, represent nearly 8.3% of the S&P 500, or equivalent to the smallest 192 companies in the S&P 500.”

So it goes without saying, he adds, that some investors are angered by the 500’s vulnerability to a “Newtonian event:” Apple falling to the ground, and the outsized impact that a declining stock price would have on the Index.

“To these investors, I say ‘don’t get mad, get even’, or look toward equal-weighted indices that level the playing field by removing the skewing effects of mega-cap stocks. In other words, an index that treats 'Big Blue' the same as it does Big Lots,” Stovall writes.

Today, investors can construct global portfolios of equal weighted indices that consist of large-, mid- and small-cap U.S. stocks, he explains, as well as issues from developed and emerging international markets. And from Dec. 31, 1999, a starting date consistent with all five indices referenced, through March 31, each of the equal-weighted (EW) indices posted superior compound total returns than their capitalization-weighted (CW) equivalents.

“In addition, each EW index recorded higher return-for-risk ratios than their CW version. One possible reason for the across-the-board EW compound annual total return outperformance is that the 2000s have thus far been a mid-/small-cap millennium, as the S&P MidCap 400 and SmallCap 600 benchmarks have each outperformed the S&P 500 in 10 of the last 12 years.”

The S&P 500 is the only benchmark in which investors can currently find EW sector ETFs, he claims. Two major differences between the CW and EW sectors are representation and returns. As a result of equally weighting all of the companies in the S&P 500, the overall representation that each sector has within the broader benchmark has also changed.

“So there you have it. On April 9, Apple shares peaked at a 57% YTD advance, taking the S&P 500 along for the ride to a near-13% YTD gain. Since then, the shares have declined nearly 5%, as did the overall market. During this outsize advance, investors have become increasingly vocal as to their concerns surrounding the influence that Apple and the other mega caps have on the performance of the overall index. These investors may wish to consider equally weighted benchmarks as a way to neutralize the impact of these highly influential high fliers, not only in the S&P 500 but also in other U.S. and international benchmarks.”

Reprints Discuss this story
This is where the comments go.