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How to look beyond the 'Magnificent 7'

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As we close in on the last month of 2023, there are a couple of consistent themes from the year that stand out.

First, the dominance of both the AI trade and news cycle. And second, investor hand-wringing over the reliance on megacap tech stocks to fuel this year’s gains.

Obviously, the two themes are linked. Apollo chief economist Torsten Sløk was one of the latest to flag the lofty valuations of the “Magnificent Seven” in his daily chart email on Monday. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)

“Investors buying the S&P 500 today are buying seven companies that are already up 80% this year and have an average P/E ratio above 50,” Sløk wrote. “In fact, S&P 7 valuations are beginning to look similar to the Nifty Fifty and the tech bubble in March 2000.”

Investors have consistently put money to work in tech this year, according to Bank of America fund flow data. Information technology and communications services (which together contain the seven stocks — Meta, Amazon, Apple, Alphabet, Microsoft, Nvidia, and Tesla) have attracted the most investment from BofA clients this year, a combined $31 billion net.

Now, those looking for growth after these huge gains are at a crossroads: backing a winner that’s “already up 80% this year” in a momentum trade or looking at the hundreds of other, underappreciated companies.

The latter is part of Jennifer Grancio’s investment approach. She was CEO of sustainable investing firm Engine No. 1 before it sold its ETF business to asset management giant TCW, where she’s now global head of wealth.

Some of her picks seem more like traditional value plays, which tend to have lower valuations and slower profit-growth profiles. But she says the goal is to find growth in value’s clothing.

“We’re always looking for companies that grow,” she told Yahoo Finance Live. “If you were to look at our portfolio, it probably is a blend portfolio that’s a little bit more on the value side. But if we’re right, that will be a growth portfolio over time. We’re looking for things that are undervalued and we think will have strong appreciation.”

She’s looking to commercial aerospace suppliers — both plane makers like Airbus and parts manufacturers — that she said can benefit from continued demand for air travel as well as innovation that will make flying more efficient.‌

She also likes the decidedly unsexy waste management companies, which are usually considered as value as value gets. She said they’ll benefit as inflation slows and from the waste needs generated by big infrastructure and construction projects. They’re also collecting methane and other gases from landfills and selling them.

“They’re well positioned for this huge boom in manufacturing, and they’ve got some creative upside on the new sources of energy,” Grancio said.

Maybe trash can be magnificent too.

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