Tech's tortoise beats the hare

Good morning. Unhedged has never covered the New York State justice system before, and we have no plans to change that policy. As far as this newsletter is concerned, the most interesting news yesterday was the downward revision of first quarter GDP and some interesting earnings reports (see below). Please email your judicial, political, and non-partisan opinions to: robert.armstrong@ft.com.

Choose a Side: HP vs Salesforce

HP, perhaps the most modest and slowest-growing of U.S. tech companies, and Salesforce, perhaps the most glamorous and fastest-growing, both reported quarterly results after the market closed Wednesday. Tech Turtles rose 17% on Thursday as the PC sales cycle turned around, while Rabbits fell 20% after the company targeted growth of just 8% this quarter, a figure that HP would only dream of.

HP makes antiques, more specifically personal computers, printers, and printer cartridges. Since being spun out from HP Enterprise in late 2015, the company has grown 1.5% annually and its profits have risen 3%. During the same period, Salesforce, which sells web-based customer relationship management software, has seen its revenue grow 22% annually and its profits grow 44%.

The total returns for the two stocks over this period are:

HP earns over 16 percent annually, while Salesforce earns just under 13 percent. I mention the huge difference in growth rates and the disconnect in profit margins to make a very simple point: Even in an era when growth stocks are generally doing better than value stocks, the price you pay for a stock still matters a lot. HP has been trading at single-digit multiples of earnings for a long time. No one thought laptops or expensive ink were the products of the future. Salesforce is one of the great disruptors in the software industry. And HP is the better stock.

Moreover, HP's stock is currently trading at 11 times this year's expected earnings, making it more expensive than it has been in the past, while Salesforce is at its cheapest price of all time, at 21 times. Which one would you buy now? Speaking for myself, every time I buy a super expensive cartridge for my printer, I gain a newfound respect for HP's business model.

Bad breath, also

The opening line of a very good column on Nvidia by my friend and former colleague James McIntosh argues that one theory that U.S. stock bulls have been arguing about market breadth has recently collapsed.

Remember earlier this year when bulls were excited that the rally had expanded beyond the “Magnificent Seven” stocks and was growing in size as a sign that the market rally was sustainable? Not really.

Just four big tech stocks have gained more market capitalization this month than the rest of the S&P 500 combined, as the index hit new records. The short-term outperformance of small-cap stocks appears to have run out of steam again. Nvidia, Microsoft, Apple and Alphabet have added a combined market capitalization of more than $1.4 trillion this month, more than the other 296 stocks that rose. Half of the gains were driven by one company: chipmaker Nvidia.

This was a bit unsettling for me, as I am one of those who point out the widening. In late February, I wrote that it is not just the big tech companies that are driving the market up. The big companies, due to their sheer size, are taking up a large chunk of the total value created in the market, but I argued that the rest of the market is also doing well in percentage terms. I focused on the period after the market bottoms in October 2023. Here is my chart from back then:

As it turns out, this was a temporary phenomenon. You can see this, for example, by comparing the performance of the market-cap-weighted S&P 500, which is dominated by big tech companies, to its equally-weighted doppelganger, which isn't.

From October 2023 to February 2024, Big Tech stocks slightly outperformed the overall market. This trend continued until about a month ago, when, as McIntosh points out, Big Tech began to rumble again. And as the chart above shows, Big Tech dominance has been a regular pattern, with brief interruptions, for almost a year and a half.

Two questions. First (and I've asked this before), how worried should we be about concentrated markets? 87% of the S&P 500's dollar gains this year have come from 10 stocks. But in the past, narrow markets have never been a harbinger of disaster. Second, why are big tech stocks starting to pull away again now? Part of that is just due to Nvidia's impressive earnings, but I don't think that's the whole story.

Two good reads

Private equity and healthcare. And plumbing.

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