Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) are also important because of their market capitalizations — $263 billion and $368 billion, respectively — and how they affects the companies’ contribution to the performance of the S&P 500. My research has uncovered some surprising, if not startling, revelations about the long-term performance of the S&P 500 Index, and how some of the most favored companies in this index have actually underperformed. Anecdotal evidence suggests that the largest allocation in equity portfolios is the S&P 500, which has become a proxy for “the market.” However, traditional indexes such as the S&P 500 have major flaws in their construction. For one thing, the indexes are market-cap weighted. By the time companies become large constituents of the index, they’re often past their innovative and high-growth phases and more often than not act as a significant drag on performance. That’s what has happened to both Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL). Priceline.com Inc (NASDAQ:PCLN) has a market cap of “only” $34 billion, so its effect on the index is not as great.
According to Ned Davis Research, “popularity kills.” Since 1972, the S&P 500 increased nearly 5,000%. Yet the top stock in the S&P 500 by market capitalization increased in value approximately 400%. With this in mind, let’s see what I wrote last year:
Priceline’s stock price increased 50.74% last quarter and currently sits around $755 a share. Similarly, Apple shares have increased 50.43% since the start of 2012 and are near $625 but off their recent high of $632. By contrast, Google shares have declined by 2.78% and are currently at $635 a share. … The trend data reflects Priceline and Apple’s significant price appreciations this year that have outpaced estimated growth rates … We should expect the rate of price appreciation to abate.
| Stock | Current Price / Level | April 2012 Price / Level | % Increase / Decrease | Market Cap | EQ Score |
|---|---|---|---|---|---|
| Priceline | $685 | $755 | (9.27%) | $34B | F |
| Apple | $393 | $624 | (37.01%) | $368B | B |
| $800 | $635 | 25.46% | $263B | D | |
| S&P 500 | 1,555 | 1,370 | 13.50% | $13.28T | NA |
Source: Yahoo! Finance.
Priceline.com Inc (NASDAQ:PCLN)’s stock price declined 9.27%, but because its market cap is low relative to Apple Inc. (NASDAQ:AAPL) or Google Inc (NASDAQ:GOOG), its drop had less of an effect on the S&P 500’s performance — just -0.346%. By contrast, Apple’s price decline had an exaggerated effect on the index’s performance. Apple’s market cap equals 27.7% of the index, so its negative 37% price decline lowered the index by 3.74%. Google, meanwhile, improved the index performance by 2.67%.
In the past, my research has incorporated a Motley Fool Earnings Quality score, or EQ, that taps into a database that ranks individual stocks. The database designates an “A” through “F” weekly ranking, based on price, cash flow, revenue, and relative strength, among other things. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.
Google Inc (NASDAQ:GOOG)’s EQ score last year at this time was “F,” equivalent to a failing grade, but it improved recently to a “D.” Apple improved from a “D” to a “B” during this time, and priceline.com has remained an “F.” The model downgrades stocks that are overvalued relative to these metrics.
GOOG Gross Profit Margin Quarterly data by YCharts.
Google Inc (NASDAQ:GOOG)’s chart doesn’t reflect its most recent numbers, reported on April 18. However, the trends are apparent. The company’s gross margin slipped from 65% to about 54%, and then back up to 60%, reflecting the increasing cost of goods sold. According to Capital IQ, the most recent gross margin came in at 57%. Revenue also declined last quarter to $13.21 billion but was reported at $13.97 billion for the latest quarter. The rising P/E ratio for the past 12 months of 24.42 reflects the stock price gains. According to Yahoo! Finance, this figure has increased slightly to 24.83.
AAPL Revenue Quarterly data by YCharts.
Apple Inc. (NASDAQ:AAPL) reported its quarterly results April 23, but for investors with a long-term view, it shouldn’t matter. Analysts expect Apple’s revenue to be $42.59 billion, only an 8.7% improvement over last year. Earnings expectations of $10.07 a share will be less than in the same quarter a year ago. Apple’s revenue and operating cash flow trend lines will probably remain sloping upward.
Foolish bottom line
Not many of us can withstand the precipitous price declines Apple Inc. (NASDAQ:AAPL) and Priceline.com Inc (NASDAQ:PCLN) have exhibited in recent months, yet we don’t want to sit idly by while the major averages and indexes continue to rise. The point of this article, however, is that there are many companies in the S&P 500 with high-quality earnings that are positioned to help the index rise, and not drag it down. As always, Foolish readers should base investment decisions on earnings quality.
The article 3 Highfliers Revisited: Where Are They Today? originally appeared on Fool.com.
Fool contributor John Del Vecchio is the co-author with The Motley Fool’s Tom Jacobs of What’s Behind the Numbers? How to Expose Financial Chicanery and Avoid Huge Losses in Your Portfolio. He owns no shares in the companies mentioned in this article. The Motley Fool recommends and owns shares of Apple, Google, and priceline.com.
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