Five Stocks That Might Beat the Magnificent Seven in 2024

Some strategists have questioned how long the big tech party can last, citing factors from the impact of interest rates to high valuations, but plenty of others believe that these winners will continue to outperform in 2024. Just this month
Microsoft
was named a top cloud pick for 2024, retail analysts have continued touting the power of Amazon, and technical strategists point to Apple’s likely ability to reach new all-time highs, to name but a few examples.

In short, to borrow another phrase from the Bard, past is prologue: Wall Street expects 2024 winners to look very similar to this year’s stars.

Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, doesn’t deny that these seven have a good deal of momentum behind them going into the new year, and have a chance of making more headway. But he told Barron’s that none is likely to be the king of 2024.

The problem, he says, is that none fit the characteristics of the stocks that have been the S&P 500’s top performer each year for the past decade spanning 2013 to 2022. Those that took the No. 1 spot—including
Tesla
in 2020—tended to have four factors in common that currently exclude all of the Magnificent Seven.

The first is stock price volatility: All of the No. 1 stocks over the past 10 years have moved around a lot, or to be more precise, their volatility over the past 12 months is at least 1.5 that of the previous year’s median stock by total return in the S&P 500.

The second is the Fridson-Lee statistic, developed with researcher John Lee; its formula is simply the highest analyst earnings per share estimate minus the lowest on the Street, divided again by the lowest estimate. A stock has to sport a Fridson-Lee statistic of 18% or greater to satisfy this criterion.

Thirdly, they don’t have pristine balance sheets, but usually have ratings of Baa3 or Lower by Moody’s or BBB- or Lower by Standard & Poor’s (though some may not be covered by both or even one ratings agency). And finally, the No. 1 stock in recent years hasn’t been a behemoth, but rather has a market capitalization of 80% or less than the previous year’s median (or 250^th) stock in the S&P 500.

Taken together, these four factors basically set the stage for a company to deliver the unexpected in a way that has maximum impact. While some investors shun volatility, you don’t get a triple-digit 12-month return without a lot of movement; likewise the less consensus there is about a company’s earnings the more wiggle room it has to deliver a big surprise. Less than pristine balance sheets mean a stock isn’t an overcrowded safe bet. And finally size matters, as even great news can only move the needle so much on a trillion-dollar company.   

All of these characteristics, explored more closely in Fridson’s book The Little Book of Picking Top Stocks, apply to only five stocks:
Boston Properties,
Carnival,
Expedia,

Norwegian Cruise Line Holdings,
and
Warner Bros. Discovery.

Of course, surprises go both ways—all the features that lay the groundwork for a big move don’t guarantee that that move will be higher. Fridson is the first to say that investors still need to diversify and shouldn’t concentrate their portfolios on these potential No. 1 candidates.

However for those investors looking to capture some lightning in a bottle, it’s worth noting that this is what winners have looked like for the past decade; Nvidia is already an outlier in its performance this year, and any of the Magnificent Seven stocks would truly have to break the mold to take the top spot in 2024.

Fridson isn’t the only one to think that big tech’s stranglehold won’t last forever. Royce Investment Partners, a unit of
Franklin Templeton
that has long focused on small-caps, argues that the valuation and opportunities of smaller companies will make them too hard to ignore next year.

In a presentation earlier this month, Allspring Global Investments highlighted how unprecedented the top seven stocks’ outperformance has been, while noting that “small and mid-cap [stocks] haven’t been this relatively inexpensive in two decades.” It also sees opportunity in lagging defensive stocks and emerging market companies that supply and support artificial intelligence players.

Likewise Richard Bernstein Advisors argues that an economy as healthy as the U.S.’s at the moment can support many more winners “so the Magnificent 7’s extreme outperformance suggests their rally has been fueled more by speculation than by fundamentals…2023’s speculation could make 2024 the beginning of a once-in-a-generation opportunity for investors willing to embrace diversification.”

In other words, out with the old, in with the new.

Write to Teresa Rivas at teresa.rivas@barrons.com