Bigger May Not Be Better
By Ben Ferris, CFA
The size of these companies fits more into the “need to know” category.
The S&P 500 has returned roughly 15% per year over the past decade. Two thirds of this return, or 10% per annum, has come from the likes of just five companies: Amazon, Apple, Facebook, Google and Microsoft.
One can argue that given the incredible returns over the past decade, the five companies previously mentioned (Amazon, Apple, Facebook, Google and Microsoft) are priced as if their future success is in- evitable. Innovation is a hallmark of American capitalism. New technology replaces old, industries are flipped on their heads, and companies face ruthless upheaval to adapt and remain competitive less they fall to the wayside. A quick look at history reveals an ominous sign for the potential future of these current-day behemoths.
As a result, these five companies now comprise over 15% of the entire S&P 500 index, or a whopping $4.6 trillion of value. The Information Technology sector today represents about 22% of the S&P 500. While still a decent shout from the historically high 30% reached at the height of the Internet Bubble, peeling back the layers reveals a different story. As it stands, Amazon, Google, Facebook, and Netflix are not included in this sector of the index despite the fact these companies greatly benefit from the rise of internet usage and information technology. A cynic might argue that it is harder to sell an indexed product on Wall Street if it appears less diversified. If we include these companies and other natural beneficiaries of the internet, we’d find that the percentage grows to just over 30%.
Here is a look at the ten largest US companies by assets in 1917 presented by Forbes (Market Capitalization was not available):
| Rank | Company | Assets $mm |
| 1 | U.S. Steel | 2,500 |
| 2 | AT&T | 762 |
| 3 | Standard Oil | 574 |
| 4 | Bethlehem Steel | 382 |
| 5 | Armour & Co. | 314 |
| 6 | Swift & Co. | 306 |
| 7 | International Harvester | 265 |
| 8 | E.I. du Pont de Nemours | 263 |
| 9 | Midvale Steel & Ordnance | 256 |
| 10 | U. S. Rubber | 250 |
Although it is interesting to study, sector weightings are sometimes subjective and perhaps speak more to the changing nature of an economy over time than to any latent risks to specific companies or markets. If comparing the historical sector breakdown falls into the “nice to know” category, a historical comparison of
The list looks quite different in 1967:
There were more survivors this round with Exxon, General Electric, and AT&T remaining on the list. However, the next twelve years up to today were not kind to many of these companies, and only one (Microsoft) ended up outpacing the S&P 500 over that timeframe. In fact, four of the ten above have had negative total returns in one of the longest bull markets in history.
| Rank | Company | Assets $mm |
| 1 | IBM | 35,200 |
| 2 | AT&T | 27,300 |
| 3 | Eastman Kodak | 24,100 |
| 4 | General Motors | 23,400 |
| 5 | Standard Oil (merged into Exxon/Mobil in 2001) | 14,500 |
| 6 | Texaco (merged into Chevron in 2001) | 11,200 |
| 7 | Sears & Roebuck | 8,800 |
| 8 | General Electric | 8,700 |
| 9 | Polaroid | 7,900 |
| 10 | Gulf Oil | 7,900 |
As you can see, only two of the companies (AT&T and Standard Oil) remained in the top ten fifty years later.
Consequently, today’s list looks remarkably different than just twelve years ago. Only Microsoft and Exxon Mobil remain on the top ten list:
| Rank | Company | Market Cap ($mm) |
| 1 | Apple | 1,145,000 |
| 2 | Microsoft | 1,102,000 |
| 3 | Amazon | 895,000 |
| 4 | Alphabet (Google) | 894,000 |
| 5 | 554,000 | |
| 6 | Berkshire Hathaway | 539,000 |
| 7 | Johnson & Johnson | 345,000 |
| 8 | JP Morgan Chase & Co. | 408,000 |
| 9 | Visa | 392,000 |
| 10 | Exxon Mobil | 308,000 |
Forty years later, on the eve of the financial crisis in 2007, the list looked like this (market cap instead of assets):
| Rank | Company | Market Cap* ($mm) |
| 1 | Exxon Mobil | 512,000 |
| 2 | General Electric | 393,000 |
| 3 | Microsoft | 281,000 |
| 4 | AT&T | 255,000 |
| 5 | Citigroup | 253,000 |
| 6 | Bank of America | 216,000 |
| 7 | WalMart | 197,000 |
| 8 | Proctor & Gamble | 192,000 |
| 9 | American International Group | 181,000 |
| 10 | Chevron | 181,000 |
Perhaps the pace of technological innovation has sped up over time and incumbents are doomed to a shorter tenure on the throne. Competition is very real and as investors, we must remember that even what seem like the most enduring businesses can see their market share and competitive advantages erode over time. Mark Twain maybe said it best: “The past does not repeat itself, but it rhymes.”