The Big 6

RYAN  By Guest Blogger Ryan Lewenza

Today we’re going to have some fun with numbers. Well, fun may be a stretch since we’re not talking about some crazy Hangover movie-like experience with the “Smoking man” in Las Vegas. This is more nerdy fun like hanging out at Comic-Con dressed up as Chewbacca.

Our industry loves its acronyms (CDS’s, MBS, ROEs etc.) with “FANG” stocks being one of the more recent and popular ones. FANG stocks include Facebook, Amazon, Netflix and Google. When we add in Apple and Microsoft we get a variation of the “Big 6” we are well familiar with here in Canada. These “Big 6” US stocks have done much of the heavy lifting for the S&P 500, with these six stocks contributing roughly 40% of 2017 YTD gains and over 20% of the total gains for the index since 2013. Given how topical this investment theme is these days we thought it would be interesting to compare and contrast the US “Big 6” with our very own “Big 6” banks and see what conclusions can be drawn.

It has been a great run for these six US stocks with their combined market cap up 165% to US$3 trillion since 2012. To put this into perspective this is the equivalent in US dollars of the combined total market cap of Canada’s TSX and Germany’s DAX stock exchange value! So if you had US$3 trillion lying around (or had God as your private banker) you could either purchase 6 (great) US companies or every company listed on both Canada’s and Germany’s stock exchange!

Let’s now compare those six US stocks to the “Big 6” Canadian banks which are pretty sizable banks on a global basis and are highly profitable. The “Big 6” banks include Royal Bank, TD Bank, Bank of Nova Scotia, Bank of Montreal, CIBC and National Bank. Their combined market cap in US dollars is $344 billion or roughly 1/10th of the combined market cap of FB, AMZN, NFLX, GOOGL, AAPL and MSFT.

Here in Canada we view the Canadian banks as larger than life but we’re looking at them through the lens of a small country with just 35 million people. As President Trump would likely say, the “Big 6” US stocks are HUGEEE and our “Big 6” Canadian banks are just a bunch of “Little Marcos”.

Market Cap of the US “Big 6” & the “Big 6” Canadian Banks

Source: Bloomberg, Turner Investments

Where it gets interesting (again assuming you’re a nerd like me who gets worked up over financial stats) is when you compare the profitability of the US “Big 6” stocks with the “Big 6” banks. Looking at trailing 12-month combined earnings of the US stocks, they earned an incredible US$98 billion with Apple delivering half of this.

In contrast, the Canadian banks earned a very impressive US$29 billion over the last 12 months. So comparing the US stocks to the Canadian banks, they make 3.5x more in earning than our banks, but have a combined market cap nearly 9x that of the Canadian banks.

Net Income of the US “Big 6” & the “Big 6” Canadian Banks

Source: Bloomberg, Turner Investments

Therefore the missing piece to this analysis is stock valuations. Currently, the “Big 6” US stocks trade at weighted average P/E ratio of 56x with Amazon and Netflix trading at nosebleed P/E levels of 180x and 206x, respectively. The Canadian banks on the other hand trade at a much more reasonable 12x earnings, and you get some nice divys every few months.

P/Es of the US “Big 6” and the “Big 6” Canadian Banks

Source: Bloomberg, Turner Investments

Ok, so what’s the takeaway here?

* First, buy broad-based index funds since it’s very hard to know which stocks are going to be the big winners in a given year. Many portfolio managers have taken a pass on Amazon, Facebook and the like since they are expensive. Well not owning those stocks likely caused many PMs to underperform the S&P 500
* Canadian banks punch above their weight class delivering massive and steady earnings for investors. And they trade at very reasonable valuations while providing attractive dividends. This is why we believe investors should continue to have some exposure to them in portfolios
* Finally, if you’ve hit a big winner by owning one these US stocks then maybe it’s not a bad time to “ring the register” and take a few chips of table. Especially, if “Smoking man” is sitting at your poker table ordering double JD and cokes.

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.