Ticker Reports for May 20th
Nasdaq vs. S&P: A Detailed Breakdown of Stock Indexes
The Nasdaq and the S&P 500 are both major measures used to track the health of specific segments of the economy. The Nasdaq is a global electronic marketplace for buying and selling securities best known for its higher concentration of tech stocks. Its index, the Nasdaq Composite, is used as a benchmark to compare the performance of technology and biotech stocks. The S&P 500 is a competing index that includes a wide range of sectors but limits inclusions to the largest U.S. stocks.
While both indexes serve similar functions, the best investment for your portfolio may vary depending on your risk tolerance and investing timeline.
What Are Stock Indexes?
Both the Nasdaq and the S&P 500 are market indexes, important tools used to track the performance of a group of assets. Stock market indexes consider only a select “basket” of stocks, providing investors with a quick glimpse into how that group of assets is performing over time and on any particular day.
Stock indexes are crucial tools for comparing investments against one another, serving as a benchmark that tracks the average movement within an industry or group of stocks. For example, imagine that you’re a tech investor and you want to know if returns on recent stock investment are beating what you’d see if you’d invested the same capital into the general tech market. By comparing your rate of return to the average return of a tech-focused index like the Dow Jones U.S. Technology Index, you can quickly see if your investments are beating the general movement of the market.
What's the Difference Between Nasdaq and the S&P 500?
The primary difference between the Nasdaq Composite Index (“the Nasdaq”) and the Standard & Poor's 500, (“S&P 500”) is the stocks that make up the indexes. While both indexes measure a specific segment of the market, the type of stocks that qualify for inclusion vary primarily on the nature of the business and its size.
Market Composition
The first and most pronounced difference between the S&P 500 and the Nasdaq are the types of stocks that make up the “basket” mentioned above. The Nasdaq focuses primarily on technology-driven companies, with the Nasdaq Composite Index including more than 3,000 individual stocks that qualify for inclusion on the Nasdaq exchange. The Nasdaq includes both internationally and domestically based companies.
The S&P 500 index is largely considered to be a general measure of the performance of the U.S. economy as a whole. The “500” in the name refers to the number of stocks included in the index, which is composed of the top 500 largest companies in the United States. Unlike the Nasdaq, the S&P 500 features stocks in sectors like technology, healthcare, finance and consumer goods
Inclusion Criteria
There are a few variations in the stocks included in both indexes. The Nasdaq is made up of all stocks operating on the market, which is primarily tech-based. If a company meets the qualification criteria for listing on the Nasdaq exchange, it qualifies for inclusion in the Composite index.
The S&P 500 is more strict in its inclusion criteria. While it includes companies from a wide range of sectors, the index is only representative of the top 500 domestic companies when measured by market capitalization. It includes stocks from both the Nasdaq exchange and the New York Stock Exchange, but does not consider international companies like the Nasdaq Composite does.
Market Cap Variation
The Nasdaq Composite is made up primarily of tech companies, which tend to feature higher market capitalizations on average than companies in other sectors. Many of the top stocks included on the Nasdaq (like Apple and Microsoft) are also major components of the S&P 500. While the S&P 500 categorizes inclusions and weighting by market capitalization, it features large-cap, medium-cap and a few small-cap stocks.
What Are the Similarities Between Nasdaq and the S&P 500?
Both the Nasdaq and the S&P 500 are major stock market indexes used to track and measure the performance of a basket of representative stocks. While the criteria for inclusion might vary between them, both are used as benchmarks to compare the performance of a smaller or individual asset to the returns of some segment of the overall market.
Stock market indexes are also notable for their association with exchange-traded funds (ETFs). ETFs are investment funds that trade on the stock market in the same way as individual shares of stock. Most of the world’s largest ETFs track some form of stock index. For example, the Vanguard S&P 500 ETF (NYSE: VOO) is an ETF that includes assets in accordance with the composition of the S&P 500. The goal of these funds is to replicate the performance of the index, and both the Nasdaq and S&P 500 are the basis for multiple ETFs.
Is It Better to Invest in the Nasdaq Composite or the S&P 500?
The Nasdaq and the S&P 500 serve different purposes to investment analysts and investors alike. The best investment choice for your needs will vary depending on how long you plan to stay in the market and your overall portfolio makeup, with the S&P 500 usually being considered the more conservative choice.
Risk Tolerance
Between the Nasdaq and the S&P 500, the Nasdaq is usually considered the less stable option. The index is driven primarily by tech stocks, which tend to be classified as growth stocks. Growth stocks are companies that reinvest most of their profits back into growth and new asset development, which give them the potential to grow long-term.
While these stocks usually show higher potential for return, they’re also more volatile than larger, more established companies — like those that make up the S&P 500. If you’re looking for a less volatile investment option or have a lower risk tolerance, you may want to opt for the S&P 500.
Time Horizon
If you’re investing on a longer time frame, you may want to consider investing more heavily in the Nasdaq. The Nasdaq is made up of a high number of growth stocks, which tend to be more volatile in the short-term when compared to blue-chip options. If you’re investing for a more conservative goal (like a retirement that’s coming in a few years), you may want to invest more heavily in the S&P 500.
Diversification Needs
Diversification is the idea that you should invest in multiple sectors, companies and types of assets to reduce your financial risk in the long-term. The S&P 500 features more intrinsic diversification than the Nasdaq, which primarily focuses on technology and biotech stocks. If you’re looking to add more diversification to your portfolio, you may want to learn towards the S&P 500.
It’s important to remember that you don’t necessarily need to choose one or the other when investing in an index. You may want to include investments in both the S&P 500 index and the Nasdaq Composite when creating your portfolio.
Make Your Investment Decisions with Confidence
The Nasdaq and S&P 500 are both stock market indexes used to track specific segments of the market. While the Nasdaq focuses primarily on the top technology leaders, the S&P 500 focuses on summarizing the performance of the largest companies in the United States. The best market index to invest in will vary based on your risk tolerance, with the S&P 500 usually considered to be the more stable choice for long-term investors.
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Bill Ackman Reduced Chipotle Stock, Fundamentals Still Sound
Investors may feel uneasy seeing one of Wall Street’s top value investors, Bill Ackman, sell a stock. Reducing or even bailing out of a company could send many wrong signals to the market, so investors can follow a rule of thumb. When investors buy a stock, it is only to make money. However, selling could be a decision rooted in a dozen different reasons.
Whether it is for tax-loss harvesting, a practice investors use to unload losing positions at the end of the year to offset the capital gains they – hopefully – had during the year, or whether it is to rotate out of a sector or company weighing, selling can happen due to more than just profit taking.
Bill Ackman reduced his holdings in Chipotle Mexican Grill Inc. (NYSE: CMG) by 9.8% in the past quarter. However, it is still Pershing Square’s (Ackman’s fund) largest holding. Deciding to keep up to $2.1 billion in Chipotle stock, roughly 20% of his fund, speaks more than the recent reduction, which may not imply a bearish view of the company.
It’s Called Risk Management
Shares of Chipotle rallied by as much as 53.5% over the past 12 months, leaving the broader S&P 500 behind by roughly 26.2%. Even peers in the consumer discretionary sector had difficulty keeping up with Chipotle, as McDonald’s Co. (NYSE: MCD) and Starbucks Co. (NASDAQ: SBUX) delivered a respective 7.2% and 27.3% decline during the year.
Because of this outperformance, the weight of Chipotle stock in Ackman’s portfolio became too large. The best practice in this situation is to block intrusive thoughts leading to greed, just like a hot poker player should take some chips off the table and cool off.
Investors should be aware of this tendency to cut winners occasionally, as overstaying in a winning stock could lead to nightmare-like outcomes. Knowing this, Chipotle is far from a stock that Main Street should avoid, especially in today’s economic environment.
Chipotle’s Growth Is Nothing to Walk Away From
This isn’t going to be just any other cycle; the U.S. economy is giving economists something new to worry about. Gross domestic product (GDP), also known as the size of the economy, pushed out a mere 1.6% growth in the past quarter.
The economy is falling into stagflation because inflation remained above 3%, nearly twice as high as GDP growth. Stagflation is defined as little to no economic growth and high inflation. Portfolios need a new strategy to beat this destructive cycle.
Two things should be at the top of portfolio managers and retail investors' minds: steady and predictable growth (ideally above average). This is where Chipotle comes in to save the day, as Wall Street analysts expect to see 20.2% earnings per share (EPS) growth in the next 12 months.
This growth rate, which is definitely above the long-term GDP growth rate, is also above McDonald’s 8.3% EPS projections and the 12.9% analysts see out of Starbucks this year. Because of this above-average growth gap, markets are willing to bid Chipotle stock to 98% of its 52-week high, but that’s not all.
Compared to the retail sector’s 23.6x P/E multiple, Chipotle’s 67.0x valuation calls for a premium of 183% today. Stocks typically trade near their 52-week highs and at higher P/E ratios for a good reason, and Chipotle’s EPS growth projections could be one of them.
Wall Street’s Take
Chipotle’s financials show investors another reason to stick with this compounder. Operating at 40.9% gross margins lets management keep more capital from each dollar sold, reflected in the company’s 15% average return on invested capital (ROIC) rates over the past 5 years.
Because annual stock price performance follows the long-run ROIC rate, investors can expect their investment to rise by this percentage. All the technical and fundamental factors make Chipotle a stock to keep portfolios above today’s stagflation.
Even bearish traders aren’t looking to slow the stock down and keep it from making new all-time highs. Over the past month, Chipotle’s short interest declined by 9.7%, giving bulls the open field to squeeze the potential in the company’s fundamentals.
Digitizing the $11T commodities sector with one tiny stock
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It's an opportunity that likely won't stay at these levels for long
3 Dow Stocks to Watch as The Index Hits a New High
This year, the stock market could show investors a new divide, unlike anything that portfolios have dealt with in the past economic cycle. After contracting for over 15 months, the U.S. manufacturing and industrial sector could be set up to outperform others, even if there are currently hot issues in the technology sector.
While some may keep their focus – and capital – in names like Nvidia Co. (NASDAQ: NVDA) or choose to follow the meme stock revival in GameStop Corp. (NYSE: GME), however, the best odds to potentially outperform the market could be found in boring names within the Dow 30 index.
These companies include stocks like Caterpillar Inc. (NYSE: CAT), Home Depot Inc. (NYSE: HD), and even Honeywell International Inc. (NASDAQ: HON). As the Dow index hit 40,000 for the first time, these seemingly boring industrial stocks could catch up this quarter.
The Economy is Just Right
According to this 2024 macro outlook report set by the Goldman Sachs Group Inc. analysts, the U.S. manufacturing sector could be set for a breakout this year; here’s why.
Because the Federal Reserve (the Fed) proposes cutting interest rates later this year, which could be as soon as September 2024, according to the CME’s FedWatch tool, the dollar index could decline in value (as most currencies are valued based on their interest rates).
A potentially lower dollar could make American exports more attractive for foreign buyers, a theme that was present in February’s ISM manufacturing PMI index, which delivered a 6.4% bump in export orders. To fulfill these orders, the manufacturing sector needs to start producing, and that’s where corporate profits are set to soar.
Now that investors understand where the Dow’s momentum is coming from, three stocks could carry investors even higher.
1. Caterpillar
Investors need a dull, under-the-radar stock that is still exposed to one of the biggest trends in the economy. Weighing at 5.8% of the Dow index, Caterpillar is one of the key companies in the U.S. and globally.
Because the real estate sector is at a stalemate currently. The average homeowner holds a mortgage of 3.25% (according to the Intercontinental Exchange), giving them close to zero reasons to let go of that cheap rate compared to today’s 7.3%.
Those looking to buy a new home must handle today’s higher rate. If it wasn’t enough, they would also be shopping for a 32% more expensive home compared to pre-pandemic average home prices. The only way to break this market freeze is to build, as new supply could help normalize prices.
Analysts at Goldman Sachs see this trend, so they boosted Caterpillar's price target to $408 a share, calling for a 15% upside from today's price.
More than that, markets are willing to pay a 9.9x price-to-book multiple for Caterpillar’s balance sheet, which carries 62% debt today. Because the Fed may cut rates later this year, markets are bullish on Caterpillar’s leverage and fundamental play in the construction sector.
2. The Home Depot
Following Caterpillar’s thesis, owners and landlords will always find a few dollars in their budgets for renovation and needed repairs, whether new homes or existing ones. This is where The Home Depot comes into play.
Knowing that, as of the fourth quarter of 2023, Home Depot held a 61.9% market share in the home improvement industry, markets felt comfortable bidding the stock up to 87% of its 52-week high. But how does this compare to peers?
Controlling only 35% of the industry, Lowe’s Companies Inc. (NYSE: LOW) fell to a 30% discount to Home Depot on a price-to-sales (P/S) basis. Stocks typically have a good reason to trade at premiums over comparable peers. Home Depot’s market share exposed to upcoming home sales is one of them.
Bank of America deemed Home Depot worthy of a $425 valuation. The stock must rally 23.4% from its current price to prove these targets right.
These trends and fundamental factors justify Home Depot’s positioning in the Dow today, carrying a weight of up to 5.6%.
3. Honeywell International
How is the manufacturing sector potentially set for a busy rest of 2024? Honeywell International could be called upon for its building and manufacturing automation technology solutions, as efficiency is critical upon a sector breakout.
Not only that, as oil prices flirt with their $80 a barrel ceiling once again, Honeywell’s exposure to the energy sector – sustainable solutions in particular – could help the company see brighter days ahead, as more expensive oil makes alternative energy more attractive.
Because of this, markets placed a P/S premium of 120% in Honeywell’s 3.4x valuation, compared to 3M (NYSE: MMM) and its 1.6x multiple today.
Leaning on this market's willingness to overpay for a stock, analysts at Barclays felt comfortable placing a $232 valuation on Honeywell today, calling for a 13% upside on top of the stock's 2.1% annual dividend yield today.
If that wasn’t enough, the stock’s quality and potentially bullish road ahead called for up to $357 billion of institutional buying over the last 12 months, keeping its weight in the Dow at 3.4%.
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