Famed investor Jeremy Grantham — known for predicting several asset bubbles in the past — says the S&P 500 is in a "superbubble." But peering inside his portfolio shows how he's positioning as the "worst is yet to come."
Grantham, Mayo, & van Otterloo (GMO), the firm where Grantham is strategist, focuses its top 10 public positions in carefully crafted blue chips like tech giants Microsoft and Apple and health care stalwart UnitedHealth Group, according to an Investor's Business Daily analysis of the firm's latest reported filing with S&P Global Market Intelligence and MarketSmith.
Following Grantham's moves seems like a good idea as he appears to have a finger on the S&P 500's direction. He warned back in January that more pain for the S&P 500 was coming. He was right.
And he says much more pain is coming.
Grantham Warns S&P 500 Investors To Hunker Down
Grantham in a note to clients on Aug. 31, warned S&P 500 investors that ebullient markets in July are simply setting them up for an epic crash.
"The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness," he said. "These superbubbles ... have always — in developed equity markets — broken back to trend. The higher they go, therefore, the further they have to fall."
Grantham says the S&P 500's July and August recovery of 58% of its losses from the June low rhymes with failed rallies in the past. Meanwhile, he points out corporate profit is likely to weaken in the short term due to inflation, rising rates and energy shortages. Meanwhile, long-term problems connected to low birthrates and climate change are starting to hurt economic activity now.
"Climate can be seen this year as in danger of spiraling out of control. Never before have major droughts, and dangerously high temperatures and fires, beset China, India, Europe, and North America at the same time," he said. And he's calling for a painful correction as a result. But he hasn't dumped all his stocks.
And the ones he holds are telling.
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Grantham's Top S&P 500 Stock Bet: Microsoft
As you'd expected from one of the pioneers of indexing, GMO's public portfolio is massive and very diversified. He still has favorites, though.
More than 2,200 positions populate Grantham's portfolio, says S&P Global Market Intelligence. Not one of those positions account for more than 3% of the portfolio. That makes him very different from Warren Buffett, who prefers fewer, more focused positions.
Microsoft, though, is as close to a favorite for Grantham than any other S&P 500 stock. It accounts for roughly 2.7% of his portfolio. That's a larger position than any other.
Additionally, Grantham is showing additional faith in the stock. GMO added 6% to its Microsoft position in June. And it's easy to see why. Earnings at the company are seeing growing every year until at least 2027. Additionally, it's one of the last S&P 500 companies to have a perfect AAA credit rating. That means with its more than $104 billion in cash and short-term investments, Microsoft can better handle any economic curveballs than anyone else.
Hunkering Down Grantham Style
Speaking of safety for S&P 500 companies with lots of cash, Apple is GMO's No. 2 position at roughly 2.2% of the portfolio.
Again, security of cash is a theme. The smartphone's cash pile totals $27.5 billion alone. Add to that the company's liquid investments of more than $150 billion, and you're looking at a company prepared for a thousand-year flood. Massive cash reserves, though, haven't saved Grantham from losses. Shares of Apple and Microsoft are down 23% and 11%, respectively, this year.
And maybe that's the draw of Grantham's No. 3 position: UnitedHealth. The health plan operator sports a stable business and rich balance sheet like Apple. But shares are up 2.8% this year on top of paying a 1.3% dividend yield. It's important to note, though, GMO cut its position in UnitedHealth by 24% in June.
But again, Grantham's true safety is diversification. Holding thousands of S&P 500 stocks in large degree inoculates his portfolio from company-specific woes. And with his dour outlook, that's a good thing.
"If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one," he said.
Top Positions In Jeremy Grantham's GMO Portfolio
Largest holdings out of more than 2,000 positions
| Company | Symbol | Market value ($ millions) | % of portfolio |
|---|---|---|---|
| Microsoft | $834.3 | 2.7% | |
| Apple | 664.3 | 2.2% | |
| UnitedHealth Group | 568.6 | 1.9% | |
| Wells Fargo | 451.4 | 1.5% | |
| U.S. Bancorp | 437.3 | 1.4% | |
| Alphabet | 394.4 | 1.3% | |
| Texas Instruments | 386.5 | 1.3% | |
| Accenture | 377.2 | 1.2% | |
| Coca-Cola | 367.0 | 1.2% | |
| Johnson & Johnson | 366.8 | 1.2% |
