By Laila Maidan

Photo: Mark Minervini / Marketwatch

The “Magnificent Seven” stocks’ outperformance over multiple cycles is historically unusual — and the long run of dominance for these seven large technology stocks has convinced people that they are impervious to underperforming, says Mark Minervini, a two-time U.S. Investing champion. 

In an interview with MarketWatch, the Wall Street veteran with almost four decades of trading experience warned that the stock market’s speculative nature means there’s no margin of safety for any stock. To drive his point home, he recalled a number of failed companies that were part of the “Nifty Fifty,” a group of 50 large caps that led the market in the 1960s and 1970s. Only a handful of stocks from that group went on to thrive, like American Express Co. AXP and Coca-Cola Co KO, while others like Avon and Polaroid did not.

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Minervini is known for being a two-time winner of the U.S. Investing Championship, taking first place in the $1,000,000-plus stock division with a 334.8% annual return in 2021. He also won the competition in 1997 with a 155% return. He has spent most of his career teaching the next wave of investors how to find winning stocks using fundamental and technical analysis through his published books and courses.

One of his overarching guidelines is that while fundamentals drive the technicals, you may not always see the fundamentals in time — but the technicals can improve, or degrade, before the fundamentals become obvious to the public.

That’s because Wall Street is always looking ahead and factoring in future expectations when valuing current stock prices. It’s where the popular saying that “stocks are a discounting mechanism” comes in. It also means that by the time the big news is out or earnings are reported, the information has already been acted on, and so investors should assume it has been priced into the stock.

“Sometimes the stock will have great earnings and it will go down, and there’s other times they’ll have horrible earnings and all this bad news comes out and the stock rallies — and that’s why they say ‘Buy the rumor, sell the news,’” Minervini said.

Minervini’s way of betting on tech

What does the discounting mechanism mean for the Magnificent Seven, you ask?

Well, Minervini believes that so much positive data has already been discounted based on where those stocks are trading. Even though those stocks have pulled back in recent weeks, all of the Magnificent Seven companies except Tesla Inc. TSLA still have trillion-dollar-plus market capitalizations. That means in the long run, there’s less room for them to outperform. It’s not over for Big Tech, but they’ll most likely match market performance going forward, he noted.

If investors want to continue picking up outsize performance in tech stocks, they have to be more selective. Remember, Minervini said, that at one point, Amazon.com Inc. AMZN and Microsoft Corp MSFT were midcap companies that very few people had heard of. He believes it’s time to start looking for the next Amazon. 

“The good news is, America is absolutely booming with innovation and there are lots of companies that are going to come in and add to that picture,” Minervini said. “And so there’s going to be many, many new companies.”

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Some of those companies are ones many investors haven’t heard of yet. They could even be the ones that are tasked with supplying and servicing the Magnificent Seven.

So, then, how do you find them?

While he has a few criteria to spot new leaders, the main ones are (1) stocks trading above their 200-day moving average and (2) stocks that have a 200-day moving average in an uptrend.

“That is the most basic criteria if you’re looking for a stock that’s got the potential to be a big winner,” Minervini said. “If you go back and look at the biggest winning stocks of the last 100 years, 99% of them made their biggest move above the 200-day with the 200-day in an uptrend. So would you like to be in the 1% club or the 99% club?”

Additional criteria include (3) the stock being at or near its 52-week high.

If stocks are coming out of a bear market, then look for the ones that have held up best during the decline on a relative basis, and which are rebounding the fastest off their lows. 

Now, some of these guidelines are in opposition to what fundamental value investors may be looking for. A value investor is usually looking for stocks that are down big, trading near their 52-week lows, and have been beat up on bad news. Minervini noted that both strategies can make money — they’re just different. 

“But if you want to find where leadership is, well, leadership is never at the 52-week-low list,” Minervini said. “It’s always near the 52-week-high list. And the only way a stock can go from 10 to 100 is it has to make new highs.”

This article was first featured on Marketwatch