Investors face risks with heavy concentration in Nvidia stock due to potential market drops

From Investing: 2024-07-15 03:16:13

Portfolio managers have seen strong returns thanks to Nvidia’s soaring stock price, up 160% this year and 785% since 2023. Morningstar data shows 355 funds have 5% or more of their assets in Nvidia, a high concentration. Analysts warn of risks should competition, supply-demand balance, or valuation concerns hit the stock.

Investors are heavily skewed towards a few growth stocks like Nvidia, accounting for about a third of the S&P 500’s 17% year-to-date gain. Only 24% of stocks have outperformed the index, making this one of the most concentrated market rallies. Allocating 6% or more of a portfolio to one stock carries significant risk, especially if Nvidia’s fortunes turn.

Actively-managed funds holding Nvidia have outperformed this year, with an average 16.3% return compared to 5.7% for those without the stock. While the stock’s average price target sits around $133.45, some foresee risks such as increasing competition and the company’s rich valuation. Nvidia trades at 39.3 times forward earnings, 50% above its industry median.

Investors faced a reality check last week when Big Tech stocks, including Nvidia, dropped sharply due to cooler inflation data. Nvidia fell 6% in one day, providing a glimpse of the risks involved in being heavily invested in a single stock. Some technology-focused funds have more than 18% of their assets in Nvidia, raising concerns about concentration risk across the market.



Read more at Investing: how much is too much in a stock portfolio? By Reuters