Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla -- a group that Bank of America analyst Michael Hartnett dubbed the "Magnificent Seven," -- have taken the market by storm for an incredible outperformance in 2023 and a sustained run so far in 2024.
But what about the market's most valuable non-tech-focused companies?
Interestingly enough, if you look at the highest weighted companies in the S&P 500, it is dominated by the Magnificent Seven and Broadcom, a semiconductor company. After that, there's a slew of non-tech-focused companies. I'll call them the "Terrific 10," and they include Berkshire Hathaway, Eli Lilly (LLY 1.19%), JPMorgan Chase, UnitedHealth Group, Visa, Johnson & Johnson, ExxonMobil, Home Depot, Mastercard, and Procter & Gamble.
Together, they make up 10.9% of the S&P 500, not as much as the Magnificent Seven, but a sizable amount. The Terrific 10 are also the 10 largest S&P 500 components traded on the New York Stock Exchange, whereas the Magnificent Seven are all traded on the Nasdaq Stock Market.
Here's why the Terrific 10 can be a good bet for risk-averse investors and why the group stands a good chance of performing well during a recession.
Image source: Getty Images.
The rise of healthcare
What stands out about the Terrific 10 is that it includes three healthcare companies and four financial companies. Let's start with healthcare.
Healthcare is now the second most valuable sector of the S&P 500 behind tech, with financials at a very close third. Healthcare is known for its recession resistance since it is a basic need that isn't tied to the broader economy. But what may surprise you is the growth of top healthcare stocks.
Eli Lilly and UnitedHealth have crushed the S&P 500 over the last five-and 10-year periods. In fact, Eli Lilly is up nearly 1,000% over the last decade, a better return than Apple, Microsoft, Alphabet, Amazon, and Meta Platforms. UnitedHealth is nothing to scoff at either, posting an over 520% return.
Eli Lilly is a drugmaker, while UnitedHealth is an insurance provider. So, two different but lucrative businesses. Eli Lilly's weight loss drug, Zepbound, could become the best-selling drug in history. The excitement around the drug is a core reason behind Eli Lilly's soaring stock.
Eli Lilly investors are betting on future profits -- the stock has a 113.7 price-to-earnings (P/E) ratio. But UnitedHealth is much more of a value play. The stock is up big, but the earnings have grown, too. So even after UnitedHealth's incredible market outperformance, it still sports a lower P/E than the S&P 500 at just 21.1.
Referring back to the chart, Johnson & Johnson has drastically underperformed the market. But J&J is Dividend King with over 60 consecutive years of dividend raises and a 3% dividend yield.
The three healthcare stocks in the Terrific 10 give investors everything they could ask for -- growth from Eli Lilly, growth and value from UnitedHealth, and value and income from J&J.
Changing of the guard in the financial sector
Financials have always been a big part of the stock market. But the most valuable financial companies have changed. With a nearly $500 billion market cap, JPMorgan stands tall above the rest of the integrated banks. But after posting record earnings, it's still a good value and a reliable dividend stock with a 2.5% yield.
JPMorgan has asserted its dominance in recent years. But not long ago, JPMorgan was closer in market cap to Bank of America. And back in 2016, Wells Fargo was the largest of the four diversified banks.
JPM Market Cap data by YCharts.
It may shock you that Visa is actually more valuable than JPMorgan. Combined, Visa and Mastercard are worth nearly $1 trillion for a very simple reason -- effective business models.
Like clockwork, Visa and Mastercard make money off transactions. The more transactions, the more revenue. And as the economy grows, the volume and size of transactions continue to increase.
Visa and Mastercard have wide moats and stable inflows. But they also have impressive growth. Both stocks have roughly doubled over the last five years, but earnings have increased by a good amount, too.
There has been some valuation expansion, as Visa and Mastercard fetch higher than historic P/E multiples. But overall, these are quality businesses that are OK to pay up for.
Berkshire Hathaway is technically in the financial sector, given its conglomerate of insurance businesses. But Berkshire is much more than just insurance. It owns dozens of publicly traded stocks, with nearly half of that portfolio in Apple. But it also owns BNSF railroad and 92% of Berkshire Hathaway Energy. It also generates a ton of profit from its manufacturing, service, and retailing business.
All told, Berkshire Hathaway gives investors a bit of everything.
The other three Terrific 10 companies
Rounding out the Terrific 10 are three exceptional dividend stocks, two of which are in the Dow Jones Industrial Average in Home Depot and P&G, while ExxonMobil was in the Dow until 2020.
Home Depot is cyclical. Its earnings benefit from strong consumer spending and a growing housing market. The housing market could be a surprise winner in 2024. But beyond that, Home Depot is a stable business that generates plenty of cash to support its growing dividend, even if the economy enters a recession. Home Depot yields 2.3%.
ExxonMobil is similar in that it is cyclical and benefits from high oil and gas prices. But the company has used outsize profits in recent years to pay off debt to the point where the balance sheet is now in its best shape in over a decade. Exxon has a plan to increase net income by $14 billion by 2027 based on a conservative Brent crude oil price of $60 per barrel. In this vein, Exxon has a large margin of error to be able to grow its business, buy back stock, and increase the dividend (as it has done for 41 consecutive years). ExxonMobil has the highest yield of the Terrific 10 at 3.9%.
Procter & Gamble is the safest of the Terrific 10 companies. As a consumer staples company, P&G isn't all that affected by a weak economy. It has pricing power, stable inflows, and generates plenty of extra cash to buy back a ton of stock and raise its dividend -- which it has done for 67 consecutive years. P&G's top brands, paired with its exposure to different consumer categories make it arguably the single safest dividend stock in the entire S&P 500. P&G yields 2.6%.
The Terrific 10 is worth buying now
The hype surrounding the Magnificent Seven has been largely justified, given the growth potential and positioning of these top companies. But as we've discussed, there has been plenty of leadership in other market sectors, too.
The Terrific 10 contains a nice balance of growth, value, and income. It may be a good choice for investors who already have a lot of exposure to tech and are looking to diversify. Risk-averse, income-orientated investors will find plenty of quality dividend stocks in the Terrific 10 as well.
