“What we lost in the fire we will find in the ashes.”. Magnificent Seven the movie.
The magnificent seven is not just a movie but seven stocks that have driven the stock market to record highs. The most recent surge has been related to expectations for further AI inspired growth. At times these stocks had rising prices because they had rising prices. A class of investors purchase stocks with upward momentum which only reinforces the stocks’ winning ways. They stay until the stock stops rising. Recently 3 of the Magnificent Seven have been burned and declined. You have to ask yourself if the price of the stock fully reflects the potential of the stock to grow earnings. Only 6 months ago analysts totally misjudged the potential for Nvidia to grow its earnings based on the need for specialty chips required by AI. These stocks could still be cheap or they could be pricing in hope and not reality. Just think of the early days of Amazon when it was solely a website for selling books and today it is a global retail powerhouse with a technology division, Amazon Web Services. I can assure you no one could have predicted the potential in Amazon.
When we look back, we see we missed trends like the Magnificent Seven. Given the benefit of new information these stocks presented an opportunity but we did not know that information at the time. We are comfortable purchasing stocks that might be buried in the ashes. The pipeline companies are unloved but present the investor with 7% yields. If the shares appreciate by 3% then the investor will get a 10% annual return. Ten percent is a healthy rate of return. The return is not guaranteed nor will it be a steady 3% per year. The stocks could decline 10% in a year and recover over a couple of years. Investing requires patience but it is nice to get paid a steady, potentially increasing, dividend while you wait.
