Choosing US stocks: Beyond the obvious

The year was 2023. The US market was shrouded in gloom, with fears of inflation and high interest rates lurking in every corner. But out came seven stocks, saving investors from yet another year of disaster. Sounds like a quintessential Western script. So, it's no surprise that those gunning for high returns named the seven stocks—Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—the Magnificent Seven, after the cult classic Western that tells the tale of seven skilled gunmen who save a town from bandits. In the movie, however, the seven gunmen trained others to fight back against the bandits. Has Wall Street's own Magnificent Seven done the same and inspired others to deliver high returns? We have uncovered a few not-yet-magnificent but promising stocks that say yes. But before revealing their names, let's explore what makes the Magnificent Seven radiate and if investors should look beyond them. Earning their magnificence: What makes the seven companies deserving of their tag The Magnificent Seven may have earned their moniker from the cult Western. But, truth be told, Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla are magnificent even without invoking parallels. In the last five years, each of the seven companies has generated enormous returns (see 'Five-year skyrockets'). In fact, Nvidia's growth has been so outlandish that it led to rumours about the chip maker delivering the highest profit jump in the history of capitalism. So, what do these companies do to stay magnificent? Let's take a closer look at their business models and strategies that drive each of these industry giants. 1. Alphabet (Google): It's hard to imagine a world without Google. The search engine is inseparable from how people navigate the internet. But Alphabet is more than just Google. It is a conglomerate with a presence in a wide array of businesses, including cloud computing, drug discovery, robotics software and autonomous driving. However, Alphabet's leadership in search engines is what makes it magnificent. It allows it to create and sell a suite of products and services (such as digital advertising) and rake profits by the billion! 2. Amazon: Imagine starting as an online bookstore and then becoming the largest retailer online. Amazon, undoubtedly, is a true inspiration for entrepreneurs globally. What sets it apart from other retailers is its large scale, which creates a network effect and attracts more buyers and sellers to its platform. This scale provides Amazon with extensive customer data, enhancing its high-margin advertising business. Additionally, Amazon Web Services (AWS) leads the cloud computing industry, which is also a high-margin business. 3. Apple: Warren Buffett's favourite stock, Apple, has redefined consumer electronics. Its strong brand loyalty, continuous innovation and premium product quality allow it to charge premium prices. Furthermore, it has created a tightly integrated ecosystem of products (iPhone, iPad, MacBook, etc.) and services (iCloud, App Store, etc.). This integration offers a seamless user experience and encourages customers to stay within the Apple ecosystem. 4. Meta: Formerly known as Facebook, its platforms - Facebook, Instagram and WhatsApp - are used every day by billions around the world. This creates strong network effects. The more users on the platforms, the more data it can harvest on user behaviour and preferences and drive up its advertisement business. But advertisement is only one weapon in its arsenal. The company is bet

This article was originally published on July 01, 2024.