September 28, 2018
Inside-the-box thinking when
outside-the-box solutions are needed
I saw a tweet a while back when Amazon announced that it's opening a cash register-less store in Seattle:
- Put stores out of business.
- Open stores.
So simple. So true.
What is Amazon? Alexa, cloud services champion, home builder/seller since it invested in a pre-fab construction home builder recently, an artificial intelligence co, hardware manufacturer, or an advertising co? Oh yeah, an online retailer too. Warren Buffett once called it an economic miracle.
It's impossible to pigeon hole the company into just one category, i.e. consumer discretionary. To be clear, consumer discretionary means things you want and consumer staples means you need, like toothpaste and toilet paper. AMZN is the biggest company in the consumer discretionary category, so the fact that the stock has appreciated over 70% ytd explains why its sector is doing quite well this year.
The way portfolio managers categorize stocks into 11 GICS (General Industry Classification Standards) is very important in constructing stock portfolios. Let' say you don't want more than 20% of a portfolio to be in tech stocks, then you'd have to have a way to categorize all of your stocks. A little in financials, utilities, energy, healthcare, tech, etc. It's about diversification; about spreading your risk among different kinds of stocks from different sectors of the economy. Keep in mind that diversification helps spread sector risk, but it won't necessarily help you in a market that is broadly lower.
Alphabet, parent company of Google and the "G" in FANG (Facebook, Amazon, Netflix, Google) just went from being classified as a tech stock to a Communications Services stock. So, if Alphabet represents 5% of my portfolio, does that mean that I automatically have 5% less in tech and 5% more in communications services? For crying out loud, it's the same stock! Nothing really changed except an arbitrary classification by Standard & Poor's.
Only 23 companies were reclassified, but they represent Trillions of dollars of market value. Many of these new classifications, in my opinion, don't make a whole heck of a lot of sense. A lot of investors' portfolios will balloon with concentration risk due to having too much of one stock or sector because they'll "technically" be adhering to diversification without achieving the true benefit of diversification.
From Bespoke Investment Group, which does amazing research:
Below are the 23 S&P 500 companies that saw sector re-classifications. The main stocks shifting from Consumer Discretionary into Communication Services are Disney (DIS), Netflix (NFLX), and Comcast (CMCSA). Others making the same shift include Charter (CHTR), Twenty-First Century Fox (FOXA), CBS, Viacom (VIAB), News Corp (NWSA), and TripAdvisor (TRIP).
Six companies are shifting from Technology into Communication Services - Alphabet (GOOGL), Facebook (FB), Activision Blizzard (ATVI), Electronic Arts (EA), Twitter (TWTR), and Take-Two Interactive (TTWO). One Tech stock - eBay - is shifting into Consumer Discretionary (joining Amazon.com).
Finally, AT&T (T), Verizon (VZ), and CenturyLink (CTL) all shift from the old Telecom sector into Communication Services.
It's a little dry, I know, but when you see how many widely held stocks are on the list, you'll see why I think it's so important to share it with you.
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market.
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