Evaluating the Magnificent Seven Using Validea’s Guru Strategies

Evaluating the Magnificent Seven Using Validea’s Guru Strategies

The “Magnificent 7” refers to a group of seven elite large-cap technology companies that have delivered outstanding long-term returns and growth. These companies have come to dominate the U.S. stock market, making up over 25% of the S&P 500 by market capitalization.

These tech and consumer behemoths have achieved massive scale and profitability, driving the bulk of the market’s gains in recent years. As the top companies in the world’s largest economy, they are seen as the leaders of the digital economy and the faces of American innovation and global success.

So how do these magnificent 7 stocks stack up when analyzed through the lens of Validea’s guru-based stock screening models? Surprisingly, they actually score quite highly, with the exception of one stock. Let’s take a closer look:

Impressive Guru Strategy Scores

  • Apple (AAPL), which designs, manufactures and sells smartphones, PCs, tablets, wearables and accessories and provides digital services, earns a 100% score from our Warren Buffett-based model and a 90% score from our Peter Lynch-inspired strategy. The Buffett model is attracted to Apple’s consistent high profitability and returns on equity, while the Lynch approach favors its strong earnings growth.
  • Microsoft (MSFT), which develops, licenses, and supports software products, services, and devices worldwide, gets a perfect 100% score from the Buffett and Lynch models. The Buffett strategy likes Microsoft’s long history of steady earnings growth and high returns on capital, while the Lynch model scores it highly for its impressive 25%+ annual EPS growth rate.
  • Alphabet (GOOGL), which operates as a holding company with Google, YouTube, Android, Chrome and other online properties and services under its umbrella, scores 100% from the Lynch-based model and 80% from our Motley Fool-inspired approach. The Lynch model is drawn to Alphabet’s phenomenal 20%+ long-term EPS growth rate and high profit margins, while the Motley Fool screen favors its strong cash flows and return on assets.
  • Amazon (AMZN), which operates as an online retailer and provider of cloud computing services, streaming entertainment, and other offerings, receives a 90% score from the Lynch model and 80% from the Buffett screen. Our Lynch approach likes Amazon’s 25%+ sales growth rate and strong free cash flows, while the Buffett model scores it well for its consistently high returns on equity.
  • Facebook (META), which builds products that enable people to connect and share worldwide, posts an 80% score from the Motley Fool model. The strategy favors Facebook’s robust revenue growth, high profit margins, and strong return on assets.
  • Nvidia (NVDA), which designs graphics processing units for gaming and professional markets as well as “system on chip” units for mobile computing and automotive markets, registers a 100% score from the Martin Zweig-based strategy and 90% from our Buffett model. Zweig’s growth approach is attracted to Nvidia’s 30%+ long-term EPS growth rate and strong sales growth, while the Buffett model likes its high return on equity and consistent profitability.
  • Tesla (TSLA), which designs, develops, manufactures, and sells high-performance fully electric vehicles and energy generation and storage systems, is the one stock with the least guru interest, which is probably not surprising given its valuation and recent issues. It does earn an 80% score from our Price/Sales Investor methodology. This approach favors Tesla’s robust revenue growth and sees its high price/sales ratio as justified by its strong growth prospects.

Fundamental Strengths

Digging into the specific fundamental factors behind these stocks’ high guru scores reveals several shared strengths:

Consistent Profitability: Companies like Apple, Microsoft, Alphabet, and Facebook have maintained high double-digit profit margins and returns on equity and capital for many years. This type of sustained profitability is a key trait favored by our Buffett and Lynch models.

Earnings Growth: The magnificent 7 have posted impressive earnings growth, with companies like Apple, Amazon, and Alphabet compounding EPS at over 15% annually long-term. Models like our Lynch and Martin Zweig approaches target stocks with strong earnings growth.

Competitive Advantages: Through their brand power, network effects, and cutting-edge technology, these firms have established deep competitive moats in their industries. This grants them pricing power and helps ensure long-term growth – attributes favored by our Buffett and Motley Fool strategies.

Financial Health: With their fortress balance sheets and substantial cash flows, the magnificent 7 register strong financial health metrics like low debt/equity ratios, high interest coverage, and high quick ratios – all favored by multiple guru models.

Research Links

Magnificent Seven Stocks

Top Warren Buffett Stocks