...read this with the Mag7 is the Market, and you can form your conclusions.
The 13 Stocks with the Greatest Risk
Every once in a while, I analyze how much future growth is priced into the 1000 largest U.S. companies. As a shareholder, you own the right to all future cash flows of a company. If persistent inflation occurs, stocks with the most future growth priced in will face the biggest challenges. The value of a cash flow expected in 2036 erodes significantly if inflation remains high until then.
Column 1: Ticker symbol of the stock.
Column 2: The stock’s weighting in an index of the 1000 largest publicly traded U.S. companies.
Column 3: Weighting based on fundamental valuation, such as free cash flow, reflecting a company’s actual financial performance, without factoring in expected future growth.
Column 4: The absolute difference in percentage points between fundamental and actual weighting.
Column 5: The percentage difference between fundamental and actual weighting.
Currently, 13 major U.S. companies have a market weighting more than 100% above what their fundamental financials would justify. This is because tremendous growth expectations are priced into these stocks, which also means a significant risk if inflation persists. Inflation erodes the value of all those future cash flows. If inflation declines back to pre-2020 levels, these valuations might hold up. But if inflation in the 2020s remains higher than in the 2010s, investors are unlikely to continue assigning Nvidia a weighting that is 2228% above what its business fundamentals justify.
