Even The Mega-Caps Move: Volatility in the Biggest Names

Many investors think they can “hide” in big stocks. These shareholders hope they can own these stocks and ride along with the trend in the market. The idea is that the moves in these giant stocks won’t stray too far from the averages.

The reasoning goes that stocks with market caps in the hundreds of billions are pretty big companies who deliver little surprise in quarterly earnings. Less surprise means a slow and steady creep in the stock price.

Boy, are they wrong.

Industry magician (NSDQ: AMZN) rocked the world last week by reporting genuinely astounding numbers. Its stock rose 119 points (yes, that’s one hundred and nineteen) or 8% after reporting its first-quarter numbers.

Amazon has a market cap of $760 billion. The gross domestic product produced by the Netherlands last year was $770 billion. Let those numbers sink in.

I’ve been following Amazon since its IPO when it sold just books (really, nothing else but books) and the internet was just coming into its own, and the term e-commerce didn’t exist. Amazon was simply the “leading online retailer of books.” While this was true, it may have been one of the only online retailers of books at the time.

I’ve seen its revenue double, triple, and quadruple. Like me, most investors are accustomed to Amazon reporting staggering numbers. But its recent earnings release took my breath away.

The company’s revenue grew 43% to $51 billion. Think about that. It added $16 billion in new sales. While Amazon indeed sells more than just books now, its quarterly sales are higher than the entire book industry’s annual sales were when Amazon went public.

Clothing retailer Gap Inc., who has stores all over the world and a decent online presence, had $16 billion in total sales for the year. It’s like Amazon added one Gap to its number in one quarter!!

Priming the Pump

Part of Amazon’s success rides on the loyalty of its Prime customers. These customers pay an annual fee in exchange for “free” shipping on all associated purchases. Amazon, who is infamous for doling out little information to investors, surprised many last week by quantifying its Prime Members.

The company’s Prime Member base now exceeds 100 million. Again, don’t gloss over that large number. The entire population of the U.S. is 330 million. Census numbers estimate there are 125 million households domestically.

Obviously, Amazon has a broad base of Prime Members outside of the U.S., but these numbers demonstrate how the company’s results seem oblivious to the laws of large numbers.

Despite the move in Amazon’s stock, one can see why investors might think it’s a good strategy to expect lower volatility in larger stocks.

Mega-cap stocks (those with a market cap higher than $300 billion) usually have years of history, experienced management teams, established business models and copious access to capital.

Smaller cap stocks tend to be the mirror image; these tend to be younger companies getting their grounding in an industry with aggressive management teams and less generous supply of debt or capital if needed for growth.

The next reason large-cap stocks have less chance of delivery a surprise is the number of analysts following a stock. There are more than 30 analysts following Amazon right now. One would imagine that an army of well-trained and aggressively curious analysts would be pretty good at formulating accurate estimates.

Add to that the law of large numbers, and it becomes harder for a huge company to beat or miss numbers by a wide degree.

The stock market has enjoyed years of low volatility, particularly in 2017. And while investors love upside volatility, when stocks they own go up more than expected, even that good fortune can be unsettling.

Investors should always keep their eye out for analysts who know how to handle volatility. With rougher seas on the horizon, it’s best to be matched up with an advisor who knows how to keep a boat afloat in tempestuous waters.

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