This Wall Street quant model ranks the best to worst Magnificent 7 stocks

Investing.com -- Since 2020, the Magnificent 7 stocks have soared by an average of 640%, compared to approximately 100% for the S&P 500 , now accounting for about 34% of the index's weight, analysts at Jefferies said in a note Friday. 

However, the firm highlighted that performance within the group has varied significantly, with Nvidia (NASDAQ:NVDA ) and Tesla (NASDAQ:TSLA ) leading the pack.

"Not all stocks have fared equally well," Jefferies notes, highlighting that "NVDA and TSLA lead the returns." 

Jefferies believes the average monthly return dispersion of 25% emphasizes the importance of stock picking within this elite group. Even the weakest performer, Amazon (NASDAQ:AMZN ), has risen about 140%, while NVDA surged approximately 2,200%.

The Mag7 stocks have outperformed the S&P 500 in 38 of the last 60 months, achieving a 63% hit rate. Despite a challenging 2022 where the Mag7 dropped around 40% as the S&P 500 fell 20%, the group rebounded strongly in 2023, buoyed by robust earnings resilience. 

Jefferies notes that "revisions are far better for Mag7," suggesting their dominance isn't over yet, even if "the best of Mag7 returns may be behind us."

Jefferies highlighted that its Mag7 model evaluates these stocks on various factors, including growth, revisions, sell-side sentiment, momentum, valuation, yield, return on invested capital (ROIC), and R&D versus capex. 

The backtest results are said to be compelling: “A monthly backtest for the past 5 years shows that the best-ranked stock had average monthly return of 5.8%, vs 3.4% for all Mag7 stocks, beating the equal-weighted cohort in 34 out of 60 months."

“The lowest ranked stock in our model had a monthly average return of only 2.6%, creating a long-short monthly average of 3.1% (58% hit rate),” they added.

Currently, "NVDA ranks the best in our model," said Jefferies, with Google (NASDAQ:GOOGL ) as the best anti-momentum value play. 

Conversely, "MSFT ranks the lowest," while TSLA is noted as "the most volatile stock with extreme factor exposure."

 

Source: Investing.com