February 11, 2000
First, what are supercaps? The market capitialization of a stock is the current price of a share of stock times the number of shares of common stock outstanding. A stock that has a price of $10 a share and 10,000,000 shares of common stock outstanding has a market capitalization of $100,000,000.
Many times the term market capitialization is shortened to market cap. Since there are many different sizes of market caps there is a word put in front of the word cap which describes the general size of the market cap. For example, there are four common groups: 1) large cap refers to stocks with a market capitialization of greater than $5 billion, 2) Mid cap refers to stocks with a market capitialization of between $1 and $5 billion, 3) Small cap refers to stocks with a market capitialization of less than $1 billion, and 4) Sometimes to get even more specific the term microcap is used which refers to stocks with a market capitialization of less than $200,000,000 million.
Understand that the amounts I use are subject to change depending on who you talk to. Meaning, some may call a small cap less than $5 billion. Stock market capitializations have gone up so much that it's almost necessary in today's market. This is the reason why I have a fifth category, one I have not yet heard on the street. The fifth category is supercap. Supercaps, for my purposes, are stocks that have a market cap of greater than $100 billion. Now to why I avoid the supercaps.
Remember the old saying about doubling a penny everyday for one month? If you would, you would be a millionaire at the end of the month:
day 1 = $0.02
day 5 = 0.32
day 10 = 10.24
day 15 = 327.68
day 20 = 10,485.76
day 25 = 335,544.00
day 26 = 671,088.00
day 27 = $1.34 million
day 28 = 2.68
day 29 = 5.36
day 30 = $10.72 million
On the last day you made as much money on the last day as you made on the first 29 days. The power of doubling is truly remarkable. With today's high valuations and volatility I only buy stocks that I think will double within a year. What does all this have to do with the supercaps?
To double your money with a stock is definitely possible, but to continue to double your money in the same stock gets harder and harder each time the stock doubles. For example, for Microsoft to double one more time it has to add $517 billion to its market cap. If it does double in the next year, remember, Microsoft has doubled numerous times in the nineties, Microsoft will create as much wealth in the next year as it has in its entire lifetime which is well over 10 years. And then if it were to double just one more time after that, it would have to add over $1 trillion to its market cap.
Many investors and institutional investors don't pay attention to this at all which is probably the reason why you never hear the term supercap. I heard reporters (teleprompter readers), on a financial news program, say that Cisco is going to be a trillion dollar company here real soon, like adding $600 billion to their market cap is nothing. That's fine for them, but to me it means something. That trillion dollar market cap would mean that Cisco is going to have to make a lot of, one hell of a lot of money to justify their stock's valuation at that level. For example, Cisco earned close to $1 billion in the last quarter, if Cisco does turn into a trillion dollar market cap company, they will need to earn $10 billion a quarter to bring their PE down below 50. And remember that's assuming the stock stays at the trillion dollar market cap level. If the stock goes up from there, say 20% which would mean an additional $200 billion in market cap, Cisco would then have to start earning $12 billion a quarter, and on and on.
As far as the institutions go and supercaps there is an irony involved. The mutual fund companies promise (mutual fund companies don't guarantee any returns) investors to invest prudently, in fact, the company I work for even says that, due to ERISA laws, I must go through an institution to invest, that I am not responsible enough to invest my retirement money on my own, but the fact is, institutions because of the sheer size of the assets under management, can't invest large amounts of capital in small cap stocks which have the best valuations for value as well as growth stocks, due to liquidity issues, and are forced to buy the supercaps.
One final example, if Microsoft was to double just two more times, that would add $1.5 trillion to the NASDAQ index. That much of an increase would make NASDAQ go up by 1,500 points to 6,000, a 33% gain in the index (made up of well over 5,000 stocks) caused by a rise in just one stock.