MGC: The Potential Upside May Come With High Risk

seekingalpha08-22

MF3d The S&P 500 bounced back to its all-time high after a brief selloff because of waning concerns over a recession, increasing optimism over rate cuts and earnings growth power. However, unlike an ...

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However, unlike an ...</p>\n\n<a href=\"https://seekingalpha.com/article/4716435-mgc-the-potential-upside-may-come-with-high-risk\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00B5949003.HKD","symbol_name":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A\" (HKD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4716435-mgc-the-potential-upside-may-come-with-high-risk","article_id":"2461481073","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1290904448/image_1290904448.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2461481073","pubTimestamp":1724334754,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"MF3d The S&P 500 bounced back to its all-time high after a brief selloff because of waning concerns over a recession, increasing optimism over rate cuts and earnings growth power. 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However, unlike an exceptional rally in the past eighteen months, it appears that the potential upside carries a significant risk because of lofty valuation and slowing Mega-7 growth. In my view, paying a significant premium on tech and growth stocks and jumping into a bull-run around its highest level appears to be a risky strategy. Instead, Vanguard Mega Cap Index Fund ETF Shares (NYSEARCA:MGC) might be an attractive alternate option for investors who fear to miss the potential uptrend but also seek to limit the risk factor. The Upside Prospects are Strong MGC and S&P 500 price performance (Seeking Alpha) The US stock market bounced back strongly because uptrend driving factors continue to optimize investor confidence in mega-cap, tech and broader market index. These factors include a declining probability about a recession and increased chances of a rate cut to begin from the next month and broadening S&P 500 earnings growth. The latest data shows that inflation and the job market now support rate cuts. For example, the Fed has almost achieved its objective of slowing job market and taming inflation to prevent the economy from overheating. In July, the US unemployment rate surged to 4.3% for the first time since late 2021 while the consumer price index cooled to 2.9% for the first time since March 2021. As hiring slowed and unemployment rate is ticking up, the market believes a 50 basis rate cut is also on the cards to avoid an economic downturn. Although the job market is falling at a faster pace than expectations, the risk of recession appears limited. The US saw a moderate GDP growth of 2.8% in the June quarter, with the expectation that full-year growth is likely to hover around 2.5%. Goldman Sachs currently anticipates 20% chances of a recession in 2025, down from its previous forecast of 25%. On the other hand, two consecutive years of double-digit earnings growth could also provoke investors to continue paying a premium on mega-caps and high growth stocks. The double-digit growth trend has already begun in the latest quarter. Except materials and energy, companies across the S&P 500 sectors reported solid growth in the June quarter, pushing the S&P 500 earnings growth to 11% compared to expectations for a 10% increase. The technology sector reported 19% earnings growth, while consumer cyclical also posted a double-digit growth. Utilities, financials and healthcare were among the biggest contributors to earnings growth. Wall Street expects 11% earnings growth in 2024 and 15% in 2025. Earnings growth has always been a key for driving investor sentiments and share prices. The Upside Carries a Greater Risk Unlike the bull-run in the last eighteen months, the extension of uptrend is likely to face multiple headwinds. High valuation and slowing mega-7 earnings growth are expected to be the biggest barriers for more upside. Tech sector and S&P 500 forward PE (Yardeni) The S&P 500’s forward PE of 21.3x is down slightly from its July high of 21.5x. Moreover, a small percentage price increase can push the valuation to a mid-2021 level of 23x. The market began falling in late 2021 and remained in a bear market through 2022 to fix valuations with long-term averages. As the potential uptrend is likely to push valuation to a risky level, it appears that the market may have peaked. Therefore, jumping into tech or growth-focused ETFs could be a risky strategy. The tech sector and the Magnificent-7 is trading around their recent high of 29x forward earnings.   Magnificent 7 earnings growth (Zacks.com) Slowing magnificent seven earnings growth could also negatively impact the stock market performance. This is because a group contributed more than half of earning and price growth to the S&P 500 index last year. The group’s earnings growth is expected to decline to 33.5% in the second quarter from above 50% in the previous quarter. Moreover, the earnings growth of mega-caps could fall to a low double-digit percentage in the coming quarters. In the latest quarter, Tesla (TSLA) reported a 43% decline in year over year earnings, while Microsoft’s (MSFT) earnings growth was around 9%. Although Meta’s (META) earnings were widely appreciated, the pace of growth is expected to cool to a mid-teen percentage range in the following quarters. NVIDIA’s (NVDA) exceptional growth rate is also likely to reverse in the following fiscal years. MGC Could be a Solid Alternative MGC sector exposure (Seeking Alpha) Vanguard Mega Cap Index Fund ETF Shares offers one of the best ways to gain exposure to the largest U.S. stocks in the S&P 500 index, representing approximately the top 70% of market capitalization. Its portfolio appears significantly attractive because of greater combination of value and growth stocks. The portfolio is diversified with 200 stocks from all eleven S&P 500 sectors. The technology sector represents 35% of the overall portfolio weight, while stocks from consumer cyclical and communication sectors hold 20% of weight in its portfolio. MGC portfolio also offers exposure to all magnificent-7 stocks. Almost 55% of MGC’s portfolio weight in growth-heavy sectors positions the ETF to capitalize on the bull run. Meanwhile, almost 45% of stake in healthcare, financials, industrials, consumer defensive and energy sectors offers protection in tech-driven selloffs. In addition, companies from these sectors are well-established with long histories. For instance, Berkshire Hathaway (BRK.A) (BRK.B), Eli Lilly (LLY), JPMorgan Chase (JPM), Exxon Mobil (XOM), UnitedHealth Group (UNH), Johnson & Johnson (JNJ), Procter & Gamble (PG), Costco Wholesale (COST), and Home Depot (HD) are among its holdings. Moreover, due to exposure to the large-cap profitable companies, MGC’s portfolio has a higher average earnings growth rate of nearly 19% in the past 5 years, up from the tech sector’s 18% and the S&P 500’s mid-single digit growth. MGC and S&P 500 5-year price performance (Seeking Alpha) MGC’s beta of slightly above 1 vindicates my opinion about the limited volatility due to its exposure to value-heavy sectors, while half of the exposure to growth stocks increases its ability to generate market-beating returns in the uptrend. In the past 5 years, its share price soared nearly 100% compared to the S&P 500’s 93% increase. Meanwhile, Vanguard Growth Index Fund ETF Shares (VUG) and tech sector-focused ETF’s like Vanguard Information Technology Index Fund ETF Shares (VGT) have a beta of 1.20 and 1.30 in the last 36 months, respectively. The tech sector’s high beta along with a lofty forward P/E of 28x makes it a risky play in uncertain future conditions. VUG’s high beta is also blamed on nearly 76% of its concentration in technology, communications and consumer cyclical sectors. Stocks from financial, healthcare, industrial and other value-heavy sectors represent 24% of its portfolio weight. In addition, VUG’s stake in the magnificent 7 represents 50% of its entire portfolio weight. Therefore, the risk of correction increases with growth ETFs like VUG compared to MGC. Seeking Alpha quant rating also offers an A plus grade on a risk factor to MGC compared to VUG’s B grade.   MGC and VUG quant rating (Seeking Alpha) VUG earned a slightly higher quant score than MGC due to high grades on momentum and liquidity. However, MGC’s A grade on momentum and negative A on liquidity also appears robust. MGC’s expense ratio of 0.07 received an A-plus grade, and the dividend factor earned a negative A grade. The expense ratio and dividend factor are crucial when it comes to total returns over the long term. MGC offers a dividend yield of 1.21% with a three-year dividend growth rate of 8.5%. In Conclusion  As the market is standing at a crossroads, it might be a good strategy to choose investment vehicles like Vanguard Mega Cap Index Fund ETF Shares with a potential to generate market-beating returns in the uptrend while limiting the risk factor in case of a correction. Its solid combination of 200 largest growth and value stocks along with diversification to all S&P 500 sectors make it an attractive option for rotation out of tech and growth categories. On the other hand, initiating a position in tech and growth ETFs in fear of missing the potential uptrend could be a risky strategy because of their lofty valuations.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2461481073"}