From the Nifty Fifty to the Magnificent Seven: How all-star stocks are picked

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What’s the stock flavor of the current economic cycle?

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All-stars, MVPs, dream teams—whatever you call them, everyone seems enamored by the “best of the best” (of something). As you might guess, the financial markets aren’t immune to such fixations. Groupings like the Nifty Fifty (whatever happened to them?), the FANG family (FANG+, FAANG, and MAMAA), and now the Magnificent Seven stocks tend to stand out, sometimes stealing the show.

Wall Street occasionally reshuffles the market’s MVPs into different teams, branding them with sticky new names. These hot stock bundlings consist of companies favored by Wall Street for certain growth characteristics. You can think of them as front-runners that promise greater exposure to a given sector.

Let’s explore some of the best-known stock groups and consider some of their investment advantages and disadvantages.

Back in the 1960s and 1970s, the Nifty Fifty—consisting of 50 blue-chip stocks trading on the New York Stock Exchange—was considered an exceptionally solid group of growth stocks, many of them household brand names such as Coca-Cola (KO), Avon, General Electric (GE), McDonald’s (MCD), Sears, and Eastman Kodak (KODK).

Extreme optimism over these buy-and-hold stocks drove their average price-to-earnings ratio to more than double that of the S&P 500. And with valuations so high, the Nifty Fifty was credited for driving the 1970–73 bull market. But when the bear came out of hibernation the following year, the drop—at least for some of the Nifty Fifty giants—was nearly catastrophic.

For example, Xerox fell 71%; Avon tumbled 86%; and Kodak recorded a 91% plunge. Today, some of these stocks, including Avon and Sears, no longer exist. Other names, like Coca-Cola and McDonald’s, are no longer growth stocks but value stocks. So although many of the Nifty Fifty companies may still be considered sound investments today, they’ve lost the growth-stock luster that once catapulted them to Wall Street stardom. The original Nifty Fifty is history.

In 2013, CNBC Mad Money host Jim Cramer popularized the acronym FANG to represent four top-performing tech stocks: Facebook, now known as Meta Platformss (META), Amazon (AMZN), Netflix (NFLX), and Google, now Alphabet (GOOG). These companies represented not only market leadership, rapid growth, and tech dominance, but also exerted a strong influence over the broader stock market.

Apple (AAPL) soon joined the group and the name changed to FAANG. Some analysts believed the acronym represented a wider group of tech and tech-related companies, such as Microsoft (MSFT) and Tesla (TSLA), and that’s how FAANG+ came into existence. After Facebook’s name changed to Meta, and as Microsoft gained dominance in the cloud computing arena, the FANG family’s latest iteration became MAMAA: Meta, Apple, Microsoft, Amazon, and Alphabet.

Few investors during the FANG metamorphoses before 2022 foresaw the major disruptive force of artificial intelligence, or the market leadership that chipmaker NVIDIA (NVDA) would hold in the production of artificial intelligence (AI) chips (not to mention self-driving electric vehicles).

NVIDIA’s dominance in AI and the ascent of its stock price brings us to the latest tech dream team, coined The Magnificent Seven. This group consists of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. Like the characters in the 1960 movie from which the name is taken, these companies are presumably the seven biggest and baddest “gunslingers” in the tech world.

The nickname may sound clichéd or even cringey, but plenty of investors are keen on these stocks.

These stocks are both popular and popularly grouped because they all tend to be market leaders with strong growth potential. The Nifty Fifty provided exposure to various sectors across the broader market. In the case of FANG and everything after it, the stocks represent market dominance and growth in technology, which for a long time has lifted and outperformed the broader market.

Also, today, investors have access to exchange-traded funds (ETFs), many of which can offer fractional exposure to these stocks in a single share. That wasn’t the case in the 1960s and 1970s; with the exception of some mutual funds, many investors had to buy Nifty Fifty stocks outright. Few could afford all 50 of them. For investors who held the securities that fell dramatically in 1973–74, the financial mauling was quite severe.

Note that even with ETFs, entire sectors can plummet when it’s time for the bear to reign during the market cycle.

Hyped stocks—even when grouped as a larger index—can be volatile. If they happen to be fueled by frenzy as much as fundamentals, there’s the risk of overvaluation (as happened to many Nifty Fifty stocks). And if the group is overconcentrated in any given sector or industry (like the Magnificent Seven and the entire FANG family, which are highly exposed to information technology), then it’s susceptible to a drop in value if that sector (or industry) should experience a major downturn. Plus, technological changes and new competitors can disrupt companies with dominant market positions.

Perhaps the shift to the Magnificent Seven from the FANG iterations reflects this disruption. The advent of AI cast a huge shadow over the still-emerging industries of cloud computing, electric vehicle production, and metaverse technologies—at least, for now. So, if you were to invest in any of these stock groups, how would you mitigate the risks?

Diversify your holdings. No matter how smart you are, you can’t predict which companies will sustain their market leadership over time. But you can make smart decisions and take calculated risks. That’s where portfolio diversification comes in.

Diversification is not only about spreading out your risks, but also increasing your potential returns from multiple sectors and industries. It may not always prevent the value of your portfolio from sliding during a long-term bear market, but if you’re holding shares of fundamentally sound companies, then you have a better chance at weathering financial storms and rebounding once economic winter gives way to spring.

Monitor each stock’s fundamentals (if you can). Keeping tabs on all your stock picks may have been tough if you were invested in all 50 of the Nifty Fifty back in the day. Plus, without the Internet, research was both tedious and expensive. Today, however, fundamental info is easy to come by, and if you’re invested in only a handful of stocks—like the Magnificent Seven—then monitoring them is even more manageable.

Pay attention to the various financial ratios (price-to-earnings, price-to-sales, and so on), dividends, earnings reports, company guidance, and analyst upgrades and downgrades. Each of these areas offers a different angle to help you put together a more comprehensive picture of a company’s health and stock performance.

In the world of “all-star” stock groups, from yesteryear’s Nifty Fifty to today’s Magnificent Seven, investors tend to ride the wave of market hype. Yet, history has shown that these stars are not immune to the harsh realities of shifting economic landscapes.

Still, there’s nothing wrong with investing in stock market celebrities as long as you combine them with a dose of diversification and fundamental analysis, while keeping a watchful eye on market dynamics and changes in the technological and economic landscape. Opportunity and risk are two sides of the same coin. As long as the coin is legit, the real art of investing lies in knowing how to balance it on the edge of smart decision-making.