Forget the Euros which is happening right now or the Olympics next month; we have a new competition going on and it is called the market capitalisation (or market cap) race. Akin to the English Premier League table, we saw the world’s largest companies (not intentionally anyway) jostling for the top three positions, and so far, the current ones in the leaderboard are Microsoft, Apple and Nvidia.
The last couple of weeks saw quick positional changes, with Nvidia pushing Apple from second to third. Then just a few days ago after their announcement of new operating systems and Apple Intelligence, the fruit symbol climbed back up to first after a price spurt, reclaiming the top spot from Microsoft. As of the end of trading on Friday, the ranking was, in order, Microsoft, Apple and Nvidia.
It is kind of exciting to see these things happening, and finance news channels make a big hoo-ha over them (and maybe some market frenzy, too, in these counters). But the real question is, are the market cap rankings useful in our investing decision?
The Numbers Game
To recap, market cap is calculated by the current share price multiplied by the total company shares outstanding. With a huge market cap, and deducing from the mathematical formula, it could mean that:
- The number of outstanding shares is high, or
- The price is high, or
- Both.
Let us look at market cap first. Though having a high number of shares outstanding is part of the market cap equation, it does not really matter in our three examples above; from the financial website Finviz as of the end of Friday, top spot Microsoft has only 7.43 billion (bn) outstanding shares, as compared to Apple’s 15.55 bn and Nvidia’s 24.64 bn (granted that the latter had just gone through a stock split).
Price Is What You Pay…
In the markets, the price of a share/stock is the function of its demand, supply and the accompanying market sentiment. The last component of sentiment is what drives prices to outlandish highs, or unbelievable lows, because it is fuelling the demand and supply part along with other traders/investors not hyped up to it.
With price, there is also the concept of value, and that is, is the price worth the share/stock that I am paying for? Hence the famous adage by Buffett on “price is what you pay, value is what you get” comes about.
Sustainability
Hypes (or fads in my terminology) do not last long. We have counters like GameStop and AMC charging up the market cap rankings due to the inflated prices, only to fizzle out after the meme had died down. Fundamentals play an important role of whether the company can sustain its profitability, and in turn their prices and market cap ranks. The current top three are not there for nothing, and time has proven the sustainability of these companies (of products, services, etc.).
However, that does not mean they would be there forever. Before 2010, oil companies such as ExxonMobil and PetroChina, and General Electric dominated the top positions (yes, and Microsoft, too). Though Microsoft still hangs around, proving its resiliency, the other mentioned ones were not even in the top 10 going into the 2020s (save for one occasion by ExxonMobil in Q4 2022).
Is Market Cap Ranking Still Important?
The short answer is, not really, but it does provide a quick look on the health of the long-term trends of a company. We still need to go back to the fundamentals on learning about the company’s financials and guesstimating its future positioning. Deterioration takes time and does not happen overnight, so there is some time in re-evaluating before making the decision to either add, keep or sell.
A final point that I want to make is that there are other good companies around which are not in the top 100. If time is affordable, you can prospect for them using screeners and dive in further on the selected companies before making a choice. This is value investment play, looking at counters whose prices are below their intrinsic values.
Disclosure
The Bedokian is vested in Apple and Nvidia directly, and SPY ETF which includes Microsoft, ExxonMobil and components of General Electric.
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