Tech’s tortoise beats the hare

Good morning. We have never covered the New York State judicial system here at Unhedged, a policy we do not intend to change. As far as this newsletter is concerned, the most interesting news yesterday was the downward revision to first-quarter GDP, and a few juicy earnings reports (see below). Email me your non-judicial, non-political, non-partisan thoughts: robert.armstrong@ft.com.

Pick one: HP vs Salesforce

Both HP Inc, perhaps the dowdiest and slowest-growing of American tech companies, and Salesforce, one of the sexiest and fastest-growing, reported quarterly results on Wednesday after the market closed. On Thursday, shares in tech’s tortoise rose 17 per cent, as the personal computer sales cycle appears to be turning up. The hare’s fell 20 per cent, after the company targeted growth of a mere 8 per cent — a rate HP can only dream of — in the current quarter.

HP makes antiques or, more specifically, PCs, printers, and printer cartridges. Its growth rate since it was split off from HP Enterprise in late 2015 is 1.5 per cent a year; earnings have grown at 3 per cent. Over that same period, Salesforce, which sells web-based customer management software, has increased revenues at 22 per cent a year, and earnings at 44 per cent.

And here is the total return for the two stocks over the period:

HP has returned more than 16 per cent a year; Salesforce has a shade under 13. I mention the vast difference in growth and the divergence in returns to illustrate a very simple point. Even in an era when growth stocks as a group have done much better than value stocks as a group, the price you pay for a stock still matters a lot. HP has long traded on a single-digit multiple of earnings; no one ever thought laptops and expensive ink were the products of the future. Salesforce is one of the great software disrupters. And HP has been the better stock.

More to the point, HP now trades at 11 times this year’s estimated earnings, expensive compared to its history; Salesforce, at 21 times, is as cheap as it has ever been. Which would you buy now? Speaking for myself, I gain new respect for HPs business model every time I buy a sadistically priced cartridge for my printer.

Bad breadth, again

In the opening paragraphs of a very nice column about Nvidia, by friend and former colleague James Mackintosh argues that one narrative US equity bulls have been spinning, about increasing market breadth, has recently fallen apart:

Remember all the bulls earlier this year getting excited that the rally was broadening out beyond the “Magnificent Seven” stocks, and how wider gains were a sign that the market’s rise was sustainable? Not so much.

This month, as indices hit fresh records, just four giant technology stocks added more market value than the rest of the S&P 500 put together. A brief burst of outperformance by smaller stocks seems to have petered out again. Nvidia, Microsoft, Apple, and Alphabet between them have added over $1.4tn his month, more than the other 296 stocks that rose put together. Half of the gain was just one company, chipmaker Nvidia.

This was mildly alarming to me, inasmuch as I was one of those people pointing out the improved breadth. Back in late February, I wrote that it was not just big tech pushing the market upwards. While the big companies, by virtue of their sheer size, were contributing a large share of the total value created in the market, the rest of the market was rising nicely in percentage terms, I argued. I focused on the period since the market hit a bottom in October of 2023. My chart from back then:

This was a blip, as it turns out. You can see this, for example, in the performance of the capitalisation-weighted S&P 500, which is dragged around by Big Tech, relative to its equal-weighted doppelgänger, which is not:

From October 2023 through February of 2024, Big Tech stocks outperformed the rest of the market only a little. That trend continued until about a month ago when, as Mackintosh points out, Big Tech started to run away again. And as the above chart shows, Big Tech’s dominance has been the normal pattern, with brief interruptions, for almost a year and a half now.

Two questions. First (and we have asked this one before) how much should a concentrated market worry us? This year, 87 per cent of the dollar gains in the S&P 500 come from 10 stocks. But in the past, narrow markets have not presaged doom. Second, why have the Big Tech stocks started to pull away again now? Part of it is simply Nvidia’s excellent earnings, but I doubt that is the whole story.

Two good reads

Private equity and healthcare. And plumbing.

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