Opinion: Why a trillion-dollar Apple market cap is nothing to celebrate

CHAPEL HILL, N.C. (MarketWatch) — Contrarians are one group who will not be celebrating Apple’s achievement when it eclipses the trillion-dollar market-value barrier.

That could come as soon as Thursday, since a rise in Apple’s AAPL, +2.80%  stock of a few percentage points would do the trick. In intraday trading, the iPhone maker reached that milestone. The real test will come at the close of trading.

Why are contrarians being, well, so contrary? Because stocks riding a wave of popularity are, more often than not, overvalued. Contrarians believe that we should instead focus on companies that are out of favor.

Dubious bets

If you have any doubt that companies at the top of the market-cap rankings are dubious long-term bets, consider 40 years of history. The list includes such luminaries as IBM IBM, -0.20% MSFT, +1.34% and General Electric GE, -0.45%

Need I say more?

For a more systematic insight, consider an analysis I conducted of companies at the top of market-cap rankings. The list contained, for each year-end since 1980, the stock within the S&P 500 Index SPX, +0.39%  that had the largest market cap. I calculated the dividend-adjusted return for each of those stocks over the subsequent 12 months, and compared them to the comparable total return of the S&P 500 itself.

On average, those stocks lagged behind the index by more than 4 percentage points a year. And note carefully that even this number — significant as it is — understates the true magnitude of underperformance, since the stocks with the largest market values have a disproportionate impact on the performance of the S&P 500.

Note also that my analysis didn’t take into account Cisco CSCO, +1.11% which, briefly during the dot-com bubble, was the most valuable company in the U.S. It fell by more than 75% over the subsequent 12 months, you may recall. Cisco wasn’t on the list I analyzed because it contained only stocks that were at the top of the market-cap rankings as of Dec. 31 of each year.

Other research

Another indication of Apple’s risk at the top of the market-cap rankings comes from the performance of the so-called Fundamental Indexes. These benchmarks, created and maintained by Research Affiliates, weight stocks according to various fundamental criteria (sales, book value, earnings, etc.) rather than market cap. Consider the Russell RAFI U.S. Small Company Index, which has beaten the Russell 2000 Index over the past decade by 2.3 annualized percentage points. It did that not by owning different stocks than the Russell 2000, but simply by weighting each stock differently.

For a contrarian bet of a stock that should outperform Apple over the coming year or two, Chris Brightman, chief investment officer at Research Affiliates, suggests Lukoil LKOH, +7,491.61% the Russian oil company. In an email, Brightman acknowledged that this bet is “provocatively contrarian.” But, he continued, “Lukoil is a huge, profitable company that the market is pricing today at half of its book value and less than four times last year’s earnings (stock price of less than $70 with EPS of $19). Lukoil sports a 10% dividend yield!”

To be sure, “even a cursory online search will reveal lots of scary commentary” about the company. “That’s what makes it a bargain.”

Needless to say, most of you will find it emotionally a lot easier to invest in Apple than Lukoil. But whoever said it was easy buying when blood is running in the streets, to quote the words of perhaps history’s most famous contrarian, the Baron Rothschild?

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.